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1
Europe’s Productivity Gap:Catching Up or Getting Stuck?
Bart van ArkUniversity of Groningen
and The Conference Board
KNOWLEDGE ECONOMY - Challenges for MeasurementSession: “Competitiveness and Growth”
8-9 December 2005, Luxembourg
Europe is the productivity laggard of the advanced and emerging economies
Labour Productivity (per hour), annual average growth
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
EU-15 new EU-10
EU-25 USA Japan China* India*
1987-1995 1995-2004 * Per person employed, to 2003
Productivity Gaps of EU-15 Countries Relative to the U.S. Countries vary Strongly
GDP per hour, 2004, US=100%
0%
20%
40%
60%
80%
100%
120%
140%
PT GR ES SW UK IT EU-15 FI DK DE AU US NL IR BE FR LUX
GDP/hour
But for almost all EU-15 Countries Income Gaps are Larger than Productivity Gaps
GDP per hour and Income per capita, 2004, US=100%
0%
20%
40%
60%
80%
100%
120%
140%
PT GR ES SW UK IT EU-15 FI DK DE AU US NL IR BE FR LUXGDP/hour Income per capita
The Eroding Productivity Gap is becoming a Threat to European Living Standards
GDP per capita and labour productivity, EU-15 as % of US
50%
60%
70%
80%
90%
100%
110%
1960 1965 1970 1975 1980 1985 1990 1995 2000
EU-1
5 as
% o
f the
U.S
.
GDP per hour
GDP per capita
9
The Productivity-Employment Trade-Off is Not the Fundamental Problem
Elasticity of employment/population ratio on labour productivity is -0.3 in large sample of OECD countries since 1970s (McGuckin and van Ark, 2005)
Negative elasticities peter out within 3-5 years … … as new entrants adjust to labour productivity
performance of incumbents (little effects of low skilled labour)
No effects of declining hours per person on productivity Reasons for productivity slowdown or of more
structural nature related to interaction innovation, investment and market environment
10
Structural Indicators are not the perfect instrument to monitor the Lisbon Agenda
Indicators are useful as a detection device, but weaknesses for policy evaluation and monitoring
Structural indicators have too many policy variables to focus on
Structural indicators lack an analytical framework that establishes links and trade-offs between policy variables
Growth accounting provides framework to structure economic policy variables (growth, employment, investment) …
… and extend to analyse interaction with other policy variables (technology, social, environment)
Productivity is Key to Economic Performance and Competitiveness
output Total Output or GDPmeasure
input Total Hours Worked Capital Goodsmeasure (Machinery, Structures, ICT)
productivity Labour Productivity Total Factor Productivity Capital Productivitymeasure (= efficiency)
sources Motivation and Markets, Institutions and Innovation andthat competencies Regulations Technological Change
impactproductivity
growthIntangible Investment
- education & skills- R&D, patents, licencies
- organisational innovations- marketing of new products
Measures of Productivity, Input Varables and Sources of Growth
Main Aspects of EU KLEMS Project EU KLEMS project is 3-year statistical and analytical research project
funded by 6th Framework Programme Purpose is to create a database on growth accounts by industry (NACE
60+) for EU member states with a breakdown into contributions from capital (K), labour (L), energy (E), materials (M) and service inputs (S)
Full coverage of “old” EU-15 plus 5 new member states (PL, SK, HU, CZ and SI)
Limited coverage of other 5 new member states (CY, MT, LT, LV and EE) Also comparisons with U.S., Canada and Japan 1970-2005, with greatest detail for post-revision period 14 research institutes across Europe, led by GGDC and NIESR In 2nd phase conduct a number of analytical research projects
13
How does ICT Contribute to Productivity Growth?
Three channels through which Information and Communication Technology (ICT) impacts on productivity growth: 1st channel: Effect of ICT investment on labour
productivity growth through ICT capital deepening
2nd channel: Rapid technological change in ICT producing industries leading to TFP growth
3rd channel: Total Factor Productivity (TFP) growth in industries that make intensive use of ICT (incremental innovation, knowledge spillovers, etc.)
Faster Total Factor Productivity Growth Accounts for Difference between EU15 and U.S.
Sources of labour productivity growth, EU-15 and U.S., 1987-2004
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1987-1995 1995-2000 2000-2004 1987-1995 1995-2000 2000-2004
EU-15 U.S.
ICT capital deepening Non-ICT capital deepening ICT-production TFP Other TFP
Source: based on Van Ark and Inklaar (2005)
Manufacturing Labour Productivity (per hour),annual average growth
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
EU-15 USA Japan new EU-10*
Mexico China** India***
advanced economies emerging economies
1987-1995 1995-2003
For Manufacturing, Europe needs to look East !
* average Czech, Hungary, Poland, Slovakia** per person employed, 1987-94 & 1994-2002*** per person employed, to 2002
Labour Productivity (per Hour) and Unit Labour Cost, USA=1.0, 2002
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
EU-15 Japan US EU-10* Mexico China India
advanced economies emerging economies
Value added per hour Unit Labour Cost
Relative Unit Labour Cost Levels also point to need to Focus on Productivity
* Average for Czech, Hungary, Poland & Slovakia
The technological capabilities in Europe are under threat from its main competitors
19
15
60
61
68
95
151
487
655
862
1 011
1 276
150 100 50 0 50 100
Mexico (1999)
Hungary
Brazil (2000)
Poland
Taiwan
India (1998)
Korea
Russian Federation
Japan
China
EU15 (2002)
United States (1999)
Number of researchers (FTE) per 10 000 employmentBusiness enterprise reseachers as a % of total researchers (FTE)
Number of researchers (FTE)
Source: OECD, STI Scoreboard
For Market Services, Europe needs to look West !
Industry contributions to market economy labour productivity growth EU-15 and U.S., 1987-2003
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1987-1995 1995-2000 2000-2003 1987-1995 1995-2000 2000-2003
EU-15 U.S.
ICT production* Production industries**Market services** Reallocation
* Includes ICT manufacturing, telecom and software services** Excludes ICT producing industries
Service industries that invest most in ICT show the biggest productivity advantages
Difference in labour productivity contribution in market services, U.S.-EU-15, 1995-2003
-0.1 0.0 0.1 0.2 0.3 0.4
ConstructionInsurance
Water transportInland transport
CommunicationsSocial & personal services
R&DRenting of mach. & eq.
Computer servicesTransport services
Air transportHotels & catering
Professional servicesMotor vehicle trade
Other business servicesBanking
Retail tradeSecurities trade
Wholesale trade
Productivity effect Share effect
20
Measurement issues in services are big but not impossible to overcome
Measurement problems of output in services is problematic
Problems have increased with higher ICT intensity in services
Problems are concentrated in heterogeneous service industries and non-market services
There may be “errors” (which can be controlled for in analysis) but little evidence of systematic bias
More transparency on measurement is needed
21
Implications for Europe’s Innovation Policies
The 3% R&D-intensity target should not become the holy grail
Non-technological innovations (organisational) are at least as important
Little room for targeted innovation policies to facilitate service innovation: invest to improve the quality of the workforce Invest in physical and technological infrastructure to
foster innovation activities Much of the productivity-enhancing innovations in services
originate from suppliers and clients in the value chain
22
Implications for Europe’s Reform Policies Reforms should concentrate on:
Help increase entry and exit in industries Make price-quality relationships transparent Put pressure on margins in existing markets; … but also allow firms to exploit new markets; … and to exploit not abuse scale advantages
Reform management is complex: Many measures are industry-specific Reforms need to be comprehensive & complementary Time lags before productivity effects emerge Reforms need to tackle vested interests; … raise awareness of opportunities; … and facilitate transition not the status quo
23Source: Fostering Excellence, Ministry of Economic Affairs, Netherlands, 2004
Europe shows lack in dynamics of firms at the top
24
In sum … NOT the U.S., but Europe is the outlier in terms of productivity
performance in the advanced world The cause of Europe’s productivity is NOT due to the short term
productivity-employment trade-off Productive USE of ICT is the key to productivity Manufacturing competition with emerging economies is NOT just
a cost matter, but also relates to innovation capabilities Faster productivity growth in a small number of service industries
accounts for US-EU differential There is little room for targeted innovation policies in services –
quality of workforce and infrastructure is the key Reforms should support reallocation of resources to most
productive uses
25
Priorities for measurement Sectoral and industry measures are important Extend framework to include intangible investment Breaks in time series are unavoidable but need to be
well-documented More transparency on measurement is generally
needed More harmonization across Europe (and beyond) is
helpful Interaction between research and statistics, and
between producers and users of statistics is important Good statistics require funding !