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The productivity puzzle: why improving labour productivity is critical for Europe’s economic (and political) stability
P. Subacchi, M. Colagrossi
Nomura Foundation
Macro Economy Research Conference
PRODUCTIVITY, TECHNOLOGY, AND GROWTH
November 16, 2016
Chatham House | The Royal Institute of International Affairs 2
Outline
• Introduction • Labour productivity and the role of human capital
• Productivity growth: a historical perspective
• Labour productivity and TFP in the long run (1950-2016) • The (missing) ICT-driven revolution and human capital
mobility
• Productivity growth in Europe • Before the crisis: divergent patterns • After the crisis: looking for adjustment(s)
• Britain’s productivity puzzle
• Italy’s lost decade(s)
• Conclusions
Chatham House | The Royal Institute of International Affairs 3
Labour productivity: a simple framework
𝑌
𝐿= 𝐴𝑓
𝐾
𝐿, 𝑈𝑡𝑖𝑙
Labour productivity (Y/L), the output per unit of employment, can be decomposed in three main factors: • The amount of capital per labour unit (K/L), or capital
deepening; • The degree of technical efficiency with which labour and
capital inputs are combined (A), or TFP; • The degree of utilisation of production factors within the
economy (util).
Chatham House | The Royal Institute of International Affairs 4
Introducing human capital
“any stock of knowledge or characteristics the worker has (either innate or acquired) that contributes to his or her productivity” (Acemoglu, 2013). Two approaches: • The Lucas/Becker view. Human capital increases
workers’ productivity in all tasks, and as such we can think about it as a unidimensional factor of production (H) that is a function of the output (Y) similarly to labour (L) and capital (K).
• The Nelson/Phelps model. Human capital does not directly impact the output levels but rather increases the rate of absorption of new technologies, hence TFP is a function of A.
Chatham House | The Royal Institute of International Affairs 5
Labour productivity (1950-2016)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
France Germany Italy Spain United Kingdom United States Japan
1950-1969 1970-1989 1990-2016
Labour Productivity Average Growth Rates (1950-2016). Source: Total Economy Database (TED).
Chatham House | The Royal Institute of International Affairs 6
TFP growth rates (1950-2014)
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Germany France Italy Spain United Kingdom United States Japan
1950-1969 1970-1989 1990-2014
.
Total Factor Average Growth Rates (1950-2014). Source: Total Economy Database (TED).
Chatham House | The Royal Institute of International Affairs 7
US: ITC-driven TFP resurgence? (1980-2010)
0.7
0.75
0.8
0.85
0.9
0.95
1
1.05
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
TFP (CNP) United States (1980-2010) with Linear Trend (1980-1989). Sources: DataStream, University of Groningen and our calculation.
Chatham House | The Royal Institute of International Affairs 8
The (missing) ICT-driven revolution
Solow Computer Paradox (1987): computers and new techs have a limited impact on productivity; initially rejected as myopic, yet not too off the mark. Gordon (2000); once we filter out the ICT hardware sector new economy’s effects on productivity growth are surprisingly absent. More recently Ip (2015) argued that transformative innovation really is happening on the internet. It’s just not happening elsewhere.
Chatham House | The Royal Institute of International Affairs 9
The (new) role of human capital
Given the limited impact of ICT on productivity, renewed attention towards HC. The latter poses new challenges. Cross-border movements of high skilled labour was neglectable among advanced economies before the 90’s. Brain drain was a problem of developing countries alone. Within Europe, highly skilled workers began to move (free movement principle) from the south to the western and northern countries. Is a new source of (potential) imbalances.
10
Europe: from Maastricht to the crisis (1992-2007)
95
100
105
110
115
120
125
130
135
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
France Germany Italy
Spain United Kingdom
90
95
100
105
110
115
120
125
France Germany Italy
Spain United Kingdom
Labour Productivity and TFP (1992-2007). Panel of selected European Countries. 1992=100. Source: Total Economy Database (TED).
Chatham House | The Royal Institute of International Affairs
11
Europe: recovering from the crisis (2007-today)
Labour productivity and TFP (2007-2016/2014). 2007=100. Sources: Total Economy Database (TED) and OECD.
90
92
94
96
98
100
102
2007 2008 2009 2010 2011 2012 2013 2014
France Germany Italy Spain United Kingdom
90
95
100
105
110
115
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
France Germany Italy Spain United Kingdom
Chatham House | The Royal Institute of International Affairs
Chatham House | The Royal Institute of International Affairs 12
Europe: post-Crisis unemployment rates (2008-2016)
50
100
150
200
250
300
2008 2009 2010 2011 2012 2013 2014 2015 2016
France Germany Italy Spain United Kingdom
Unemployment rates (2008-2016). 2008=100. Source: OECD.
Chatham House | The Royal Institute of International Affairs 13
Short/medium term adjustments
Persistent regional-based different productivity growth rates are not sustainable: adjustment are needed. In the short/medium term there are 3 ways: 1. Increase production factor utilisation
(util); 2. Increase the capital within the economy; 3. Increase the HC within the economy
(Lucas/Becker view).
Chatham House | The Royal Institute of International Affairs 14
Long term adjustment(s)
• (1) real wages competition; achievable
through labour reforms or higher levels of inflation;
• (2) increase of HC to improve the absorption of technological innovations (Nelson/Phelps framework).
Chatham House | The Royal Institute of International Affairs 15
Britain’s productivity puzzle
75
80
85
90
95
100
105
110
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
20
09
Q1
20
10
Q1
20
11
Q1
20
12
Q1
20
13
Q1
20
14
Q1
20
15
Q1
20
16
Labour Productivity GDP (Market Prices)
Total Employment
Labour Productivity, GDP Market Prices and Total Employment, (1999-2016). Q1 2008=100. Sources: ONS, Datastream and our calculations.
In the aftermath of the financial crisis UK labour productivity took a divergent path from the economy employment levels and GDP growth. While the latter experienced an upward trend, since the onset of the financial crisis the British economy documented persistently weak labour productivity levels. This paradox is known in the literature as the British productivity puzzle.
Chatham House | The Royal Institute of International Affairs 16
Labour productivity in the UK (2000-2016)
85
90
95
100
105
110
115
Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016
Labour Productivity, United Kingdom (2000-2016). 2008=100. Linear Trend (2000-2004). Source: ONS and our calculation.
Chatham House | The Royal Institute of International Affairs 17
UK: depressed real earnings (2000-2016)
80
85
90
95
100
105
110
115
120
Real Average Weekly Earnings, United Kingdom. (2000-2016). 2008=100 with 2000-2004 trend. Sources: ONS and our calculation.
Firms find more profitable to increase labour rather than capital being the first relatively cheaper. Low real wages are driven by an high labour-supply in form of highly skilled and educated migrants from the south of Europe. Such labour hoarding is capable to explain low labour productivity levels in a context of high GDP growth.
Chatham House | The Royal Institute of International Affairs 18
Labour productivity in Italy: lost decades
90
92
94
96
98
100
102
104
Q11996
Q11997
Q11998
Q11999
Q12000
Q12001
Q12002
Q12003
Q12004
Q12005
Q12006
Q12007
Q12008
Q12009
Q12010
Q12011
Q12012
Q12013
Q12014
Q12015
Q12016
Labour Productivity Trendline (1996-2004) Trendline (1996-2007) Trendline (2001-2007) Trendline (1996-2016)
Labour Productivity, Italy (1996-2016), Q1 2008=100 and linear trend. Sources: OECD and our calculations.
Chatham House | The Royal Institute of International Affairs 19
Total Factor Productivity (1990-2014)
85
90
95
100
105
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Total Factor Productivity, Italy (1990-2014), 2001=100. Source: OECD.
TFP growth in Italy has been particularly worrisome. It is however consistent with the brain drain the country experienced since the 90’s, who caused both labour productivity to drop (Becker/Lucas) and lowered the absorption of new techs (Nelson/Phelps), hence depressing TFP growth. Investment in education and research might restore long term growth possibilities.
Chatham House | The Royal Institute of International Affairs 20
Short/medium term adjustments
Persistent regional-based different productivity growth rates are not sustainable: adjustment are needed. In the short/medium term there are 3 ways: 1. Increase production factor utilisation
(util); 2. Increase the capital within the economy; 3. Increase the HC within the economy
(Lucas/Becker view).
Chatham House | The Royal Institute of International Affairs 21
Conclusions
• European countries experienced regional-based productivity growth differential.
• The latter have been exacerbated by labour mobility: highly skilled workforce moved from the south of Europe towards the western/northern countries, following capital flows.
• Human capital mobility can help us explain both the
“British productivity puzzle” and the “Italian lost decade(s)”.
• Adjustments are needed. Mediterranean countries should engage themselves in labour market reforms and investments in human capital.
Thank you
Chatham House | The Royal Institute of International Affairs
Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to
improve its standard of living over time depends almost entirely on its ability to raise its
output per worker.
Paul Krugman, The Age of Diminishing Expectations (1994)
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