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The Slowdown in European Productivity Growth: A Tale of...
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The Slowdown in European Productivity Growth: A Tale of Tigers, Tortoises, and Textbook
Labor Economics
Ian Dew-Becker, NBER and Robert J. Gordon, Northwestern University and NBER
NBER Summer Institute Macroeconomics and Productivity Workshop
July 20, 2006
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The US Accelerates, Europe Decelerates
n From 1950 to 1995 EU productivity growth was faster than in the US
n But in the past decade since 1995 we have witnessed n An explosion in US productivity growth n A slowdown in EU productivity growth equal in size n An explosion in research on the US takeoff and but much less
research on Europe’s slowdown
n The magnitude of the shift n EU/US level of labor productivity (ALP) n 1979 1995 2004 77% 94% 85%
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Bringing Together the Two Disparate Literatures
n Literature #1, why did Europe’s hours per capita decline (hereafter H/N) n High taxes, regulations, high minimum wages n Europe made labor expensive n Movement up Labor Demand curve => low employment +
high ALP
n Literature #1 misses the turnaround n Since 1995 decline in tax rates and employment protection
measures n Big increase in hours per capita, turnaround in both absolute
terms and relative to the US Move back down LD curve
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Literature #2 on EU-US Productivity Growth Gap
n Central Focus of Lit #2 on post-1995 turnaround
n Since 1995 EU H/N has grown faster than US n Fully 85% of EU productivity slowdown has its
counterpart in a speed-up of EU H/N n Europe paid for lower ALP mainly with higher
hours rather than less consumption
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Primary Attention in Lit #2: The US Revival
n TFP accounts for most of the ALP gap, capital-deepening relatively little n ICT production TFP explains a relatively small share of EU-
US difference n Most of the difference is TFP in ICT-using industries n Of these, the most important are:
n Wholesale trade n Retail trade n Financial/securities
n Caveat – Groningen definition of ICT-Use is obsolete, retail is not ICT-intensive (See Stiroh 2006)
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Textbook Labor Economics
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Labor Input
Real
Wag
e
Labor Demand Curve
High-Cost LaborSupply Curve
Low-Cost LaborSupply Curve
(W/P)0
(W/P)1
N0 N1
Downward shift in labor supply curve reduces real wage and productivity
A
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The Labor Demand Curve
n 1970-95 EU climbs to the left n Hours per capita decline, average labor productivity increases n In this sense much of Europe’s 1970-95 productivity catchup
was “artificial,” propelled by policies making labor expensive n No busboys, grocery baggers, stores open less, no valets…
n 1995-2004 EU slides right n Hours per capita start increasing while they decline in the US n Effects are magnified by slow reaction of capital
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This Paper: There is Another Half to the Puzzle
n The EU-US “turnaround” is the 1995-2004 US acceleration minus the EU deceleration
n About 1/3 of the turnaround represents Europe’s deceleration, the rest the US acceleration
n Almost none of the literature on the EU productivity slowdown relates it to the slide down the labor demand curve. n Exception: recent paper by Saltari-Travaglini
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ALP Growth, 1981-2004
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E.U. Output Per HourU.S. Output per Hour
Percent
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Output vs. Hours
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US Output per Capita
EU-15 Output per Capita
EU-15 Hours per Capita
US Hours per Capita
We use a parameter of 1600 rather than 6400, so we’re picking up business cycle level movements
EU-US population growth is fairly constant (~.7%)
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Turnaround in TFP Growth but not Capital
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U.S Capital Input per Capita
E.U. Capital Input per Capita
E.U. Total Factor Productivity
U.S. Total Factor Productivity
Percent
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As in JHS, we know this is mainly due to movements in hours, not capital
Since 2000, productivity is not driven by investment Rather, by TFP growth and hours decline
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Defining Tigers and Tortoises, Pop Shares and Private ALP Growth
n Tigers: Ireland, Finland, Greece n Pop Share: 5% ALP 4.79%
n Middle: Sweden, Austria, UK, Germany, Portugal, France n Pop Share: 61% ALP: 2.45%
n Tortoises: Belgium, Netherlands, Denmark, Luxembourg, Spain, Italy n Pop Share: 34% ALP: 0.72%
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Within EU, big change from homogeneity to heterogeneity
n Standard deviation of ALP growth rates across 15 countries, 0.80 1979-95 to 1.23 1995-2004.
n Mainly accounted for by non-ICT TFP n Tortoises actually have negative non-ICT TFP growth
n Spain and Italy are negative overall
n Where is this coming from? Is it concentrated in one industry like retail or across many industries?
n No spillover effect from capital deepening to non-ICT TFP growth
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Comparison of Heterogeneity within Europe and within the United States n Use gross state product per employee in the US vs
GDP per employee in the EU – thanks, Susanto n The three American Tigers are Arizona, Massachusetts,
and Oregon n Acceleration ‘80-’95 vs ‘95-’04 was exactly 1.91 in
both the EU and US Tigers n Comparing eight BEA regions to five large EU nations,
n US eight regions, 1.77 to 2.77 n Big EU countries, 0.0 to 2.10
n Initial obvious explanations: automatic fiscal stabilizers in the US, labor mobility
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Productivity vs. Share Effects in EU-US, 1995-2003
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Farms/mining
Const./utilities
Manufacturing
Retail/wholesale
Trans.
Finance
Serv.
Comm.
Real estate
ProdShare
Non-ICT share
Non-durables share
Non-ICT prodICT prod
Non-durables prod
ICT share
Manufacturing is nearly as important as retail
But ICT is tiny Only ~2% hours share
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ALP growth multiplied by nominal shares
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Real Estate
Communications
Services
Finance
Transportation
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Manufacturing
Construction Utilities
Farms/Mining
U.S.
E.U.
US acceleration is widespread, not just in retail and manufacturing. EU weakness is also widespread
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Tigers vs. Middle, It’s All Manufacturing
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Farms/mining
Const./utilities
Manufacturing
Retail/wholesale
Trans.
Finance
Serv.
Comm.
Real estate
Prod
share
Of the 1.95 percentage point gap, ~3/4 is due to manufacturing
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Tortoises vs. Middle
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Const./utilities
Manufacturing
Retail/wholesale
Trans.
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Real estate
Share
Prod
Failure is more widespread. Totally unrelated industries account for the decline Note that this is largely driven by productivity, not share effects
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Interpreting the Tortoise Problem after 1995
n Failure is across the board n Consistent with basic theme of paper, that there is a
macro cause, a reduction in taxes and in regulations n Understanding Share Effects
n ICT Share higher in US vs EU and also middle vs tortoises n Big EU share deficit in retail/wholesale and services,
consistent with high tax story
n Part of Tiger success is moving resources, out of agriculture for Greece and Ireland, into ICT mfg for Ireland and Finland
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ALP and Simple Labor Economics n Y/H is only half the welfare story – H/N tells
us the other half n Decline in H/N in Europe vs US -- 88% to 74%
n In 1960, US was lowest; by 2004 it’s highest
n Big turnaround after 1995 n Growth rate of H/N
n 1979-95 -0.6% n 1995-2004 +0.5%
n Our current empirical investigation of H/N vs. taxes and regulations is still in its early stages
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The Tortoises are on a Hours Growth Tear,
How Much Due to Taxes? n Tortoise growth in H/N was 1.74 percent post 1995,
vastly outstripping the US and EU Middle countries n But Ireland also grew at 1.8%
n Reflects massive investment and associated TFP growth
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Average Tax wedge
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Note that the Tortoises are always highest, followed by Middle countries, followed by the Tigers and then the US All countries markedly reduce taxes around 1997
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Reactions of Hours to Taxes
n Regressions of H/N on tax wedge n Using H/N is a first approximation, need to study separate
effects on E/N and H/E
n Double-log specification, estimated elasticity of H/N to tax wedge is -0.4
n Changes after 1995 don’t match the tax changes very well, but they go in the right direction
n Middle countries are the exception n While everybody else was increasing H/N, middle
countries were working less – counter to tax story
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Add in reaction of capital to hours
n In the short run, unit elasticity – i.e. capital moves slowly
n Long run, zero reaction – capital adjusts n We can multiply the labor elasticity (.4) by the reaction
of capital to hours (1) by capital’s share (.33) to get the short run reaction of ALP to a 1% tax shock: .4*1*.33=.132.
n In other words, a 5% tax increase could be expected to lower short run ALP growth by ~.66%.
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Conclusion
n EU productivity growth decline is across-the-board and not concentrated in retail. Durable manufacturing and ICT are culprits
n Similarly, failing in Tortoises compared to EU average is across the board, with a significant contribution of manufacturing
n Our bottom line is a mix of exogenous tax effects and exogenous decline in TFP growth
n Analogies with US 1972-95 slowdown, Europe ran out of ideas
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What to Remember from this Paper
n Recent Reports by the OECD and others join together high unemployment and slow productivity growth as part of a general malaise.
n Our focus is different n Labor market and tax reforms have raised hours per
capita after three decades of decline. n Rising hours per capita and declining growth of output
per hour are signs of victory for European labor market reforms, not signs of defeat.