The role of production factor quality and technology diffusion

in 20th century productivity growth

Antonin Bergeaud, Gilbert Cette, Remy Lecat Banque de France

Global Forum on Productivity – 7 July 2016 Breakout Session A: Productivity spillovers, diffusion and public policies The views presented here do not necessarily reflect the ones of the Banque de France or

the Eurosystem

Taking a long-term macro view on technology diffusion

20th century: period of exceptional, although heterogeneous, growth

Slowdown in advanced economies since the 1970s:

Brief, limited in size and localized revival due the Information and Communication Technologies

Current questioning on the future of innovation

Need to take a long-term view on growth drivers to address this questioning

Total Factor Productivity (TFP) explains the lion share of GDP growth since 1890

But TFP = a residual, encompassing measurement errors, in particular of factor quality

Is it possible to identify some of the main TFP growth drivers, and hence, the reason for TFP growth decline since 2005?

1st: try to purge TFP from the quality of production factors (labour and capital)

2nd: try to identify the role of technology diffusion through 2 emblematic technologies, electricity and ICT

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What do we do?

Analysis of TFP growth over the period 1890-2013 in 17 advanced economies: G7 countries + Spain, Netherlands, Belgium, Finland,

Portugal, Australia, Sweden, Norway, Switzerland and Denmark

We reconstituted a Euro Area using 8 countries: DEU, FRA, ITA, ESP, NDL, BEL, FIN, PRT (93% of the 2010 EA GDP)

Growth-accounting framework with Permanent Inventory Method for capital harmonized for all countries.

Data and methodology available at:

www.longtermproductivity.com

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1st Step: Usual measurement of TFP with capital and labor as inputs.

2nd Step: Measurement of TFP’: TFP purged from the impact of human capital age of capital

3rd Step: Measurement of TFP’’: TFP’ minus the impact of 2nd industrial revolution GPT innovation (electricity) 3rd industrial revolution GPT innovation (ICT)

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What do we do?

20th century growth: stylised facts

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Decomposition of GDP per capita growth for 17 countries and the Euro Area Percentage points

20th century growth: GDP per capita growth relying on TFP and capital intensity

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United States: The « One Big Wave » and the ICT shock

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Total factor productivity - US (Whole economy, smoothed annual growth rate with HP filter, λ = 500, in %)

7 Source: Bergeaud, Cette and Lecat (2016)

Other advanced economies: a delayed « One Big Wave »

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1

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United States Euro Area United Kingdom Japan 8

Total factor productivity (Whole economy, smoothed annual growth rate with HP filter, λ = 500, in %)

Source: Bergeaud, Cette and Lecat (2016)

Production factor quality

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Labour: In the previous graph: number of hours worked, but educated

workers have a higher productivity Adding the average years of education in the working-age

population. IV estimates: +1 year of study → +5% labour productivity Consistent with macro studies (cf. Barro and Lee, 2010)

Capital: In the previous graph: capital stock, but innovation embodied in

new equipments Adding the age of capital in a permanent inventory method

framework IV estimates: 1 year older equipment → -1% labour productivity Consistent with Wolf (1991, 1996)

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How does factor quality impact TFP?

Average age of capital equipment (In years, Whole economy)

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United States Euro Area United Kingdom Japan

Significant but cyclical contribution of the equipment age

Source: Bergeaud, Cette and Lecat, 2016

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United States Euro Area United Kingdom Japan

Average number years of studies of the working age population (In years, Whole economy)

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Steady but heterogeneous increase in years of education

Source: Barro and Lee (2010) and van Leeuwen and van Leeuwen-Li (2014)

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0.5

1

1.5

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2.5

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3.5

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Total factor productivity - United States (Whole economy, smoothed annual growth rate -HP filter, λ = 500- , in %)

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US Total factor productivity - uncorrected

Source: Bergeaud, Cette and Lecat (2016)

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1.5

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3.5

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TFP TFP' 14

US TFP corrected for education and capital age

Total factor productivity - United States (Whole economy, smoothed annual growth rate -HP filter, λ = 500- , in %)

Source: Bergeaud, Cette and Lecat, 2016

Technology production and diffusion

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Electricity production per capita (Log of kWh per thousand inhabitants ,whole economy)

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United States Euro Area United Kingdom Japan16

Two emblematic technologies: 1/ Electricity

Source: Comin and Hobijn, 2010

ICT share in capital equipment (Current value, in %)

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United states Euro area United kingdom Japan

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Two emblematic technologies: 2/ ICTs

Source: Cette, Clerc and Bresson, 2015

Diffusion as well as production of new technologies contributes to labour productivity growth through capital intensity and TFP

Capital intensity already (although imperfectly) taken into account

Concerning technology shocks, 3 channels of TFP impact:

Direct production (TFP gains in ICT producing industries) → Taken into account for electricity (no possible importations),

→ not really for ICT (possible importation)

Mismeasurement of price declines of capital goods => Mismeasurement of capital-deepening and consequently of TFP

→ Relevant for ICT

Externalities (“manna from heaven”) → Indirectly taken into account both for electricity and ICT

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How does new technology impact TFP?

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TFP TFP' TFP''19

US: technologies insufficient to fully explain the « One big wave »

Total factor productivity - United States (Whole economy, smoothed annual growth rate -HP filter, λ = 500- , in %)

Source: Bergeaud, Cette and Lecat, 2016

Takeaways: the need for a broader view on growth and productivity

TFP growth waves are the main drivers of GDP growth

TFP growth waves and TFP growth recent decline only partly

explained by factor quality adjustment and by technology

impact measurement

Major role of other channels : improvement in the production process: assembly lines (Ford Model T in

1913);

enhanced management practices (Bloom et al., 2014);

new financing techniques (Ferguson and Wascher, 2004)…

Interactions between these channels

Hence, whatever the future course of innovation, large convergence

margins remain for most countries. 20

Appendix

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The model

1st Step: 𝑌 = 𝑇𝐹𝑃. 𝐾α. 𝐿1−α

With:

𝑌 ∶ 𝐺𝐷𝑃

𝐾: Capital stock 𝐾 = 𝐾𝐸 + 𝐾𝐵 𝐾𝐸: Equipment 𝐾𝐵: Buildings

𝐿: Number of hours worked 𝐿 = N.H N: Number of workers H: Average number of working hours per worker

α = O.3 Same for all countries and constant Results robust to other values of α

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The model

2nd Step:

𝑌 = 𝑇𝐹𝑃′. 𝐾. 𝑒−𝜀.𝐴 𝛼∙ 𝐿. 𝑒𝜃.𝑆 1−𝛼

Then:

𝑇𝐹𝑃 = 𝑇𝐹𝑃′. 𝑒−𝛼.𝜀.𝐴. 𝑒 1−𝛼 .𝜃.𝑆

With: 𝐴 ∶ Average age of equipments S: Average number of schooling years of population of more than 25 years 𝜀, 𝜃 > 0 and assumed to be the same for all countries and constant

Increase in A -> decrease of TFP for the same TFP’ Increase in S -> increase of TFP for the same TFP’

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The model

3rd Step: 𝑇𝐹𝑃′ = 𝑇𝐹𝑃′′. 𝑬𝒍𝒆𝒄𝒕𝜼. 𝐞𝝁. 𝑲𝑺𝑰𝑪𝑻

With:

Elect: electricity production in Kwh per capita

KSICT: Share of ICT capital in capital equipment, at current prices

𝜂, 𝜇 > 0 and assumed to be the same for all countries and constant

Increase in Elect -> increase of TFP’ and TFP for the same TFP’’ Increase in KSICT -> increase of TFP’ and TFP for the same TFP’’

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Estimation 2nd step

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Decomposition 2nd step

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Estimation 3rd step

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Decomposition 3rd step

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Decomposition 3rd step

Literature review

Abundant related literature Looking at the main factors of growth over the long-run and their impact has

been a widely studied subject. Some examples (among numerous, see the paper):

On all aspects, Aghion and Howitt (1998); numerous following publications

Education: Madsen (2014) finds that education explains 0.48 points of the 1.87% average growth in gdp per capita. A large related literature has focused on estimating the return of education on growth over the long run (Barro and Lee, 1992, 2010; Morisson and Murtin, 2010; Cohen and Soto, 2007; …)

Institutions: Prados (2015) build a new database on economic freedom and institution over the long run

Technology: Comin and Mestieri (2013) and Comin and Hobijn (2010) stressed the importance of technology adoption to explain divergence between economies. Madsen (2010) looked at the “Anatomy of growth” in the 20th century to highlight the importance of technology spillover using patent data

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