Do Labour Market Do Labour Market Changes Changes

Explain the Slowdown in Explain the Slowdown in European Productivity European Productivity

Growth?Growth?Robert J. GordonRobert J. Gordon

Northwestern University, NBER, CEPRNorthwestern University, NBER, CEPRHM TreasuryHM Treasury

March 18, 2008March 18, 2008

Is There an Employment-Is There an Employment-Productivity Tradeoff?Productivity Tradeoff?

Two marked events in Europe after 1995Two marked events in Europe after 1995 Slowdown in productivity growth to well below the U. Slowdown in productivity growth to well below the U.

S. rateS. rate Increase in growth of employment per capita at well Increase in growth of employment per capita at well

above the U. S. rateabove the U. S. rate Are these connected causally or just a Are these connected causally or just a

coincidence?coincidence? Which way does the causation go?Which way does the causation go?

Co-authored with Ian Dew-BeckerCo-authored with Ian Dew-Becker Look him up on google, at age 23, he has 4000+ Look him up on google, at age 23, he has 4000+

entriesentries

Ian in SF, you can’t see Ian in SF, you can’t see “MV=PY”“MV=PY”

The US Accelerates,The US Accelerates,Europe DeceleratesEurope Decelerates

From 1950 to 1995 EU productivity growth was From 1950 to 1995 EU productivity growth was faster than in the USfaster than in the US

But in the past decade since 1995 we have But in the past decade since 1995 we have witnessedwitnessed An explosion in US productivity growthAn explosion in US productivity growth A slowdown in EU productivity growth roughly equal A slowdown in EU productivity growth roughly equal

in sizein size An explosion in research on the US takeoff and but An explosion in research on the US takeoff and but

much less research on Europe’s slowdownmuch less research on Europe’s slowdown The magnitude of the shift (average EKS&GK The magnitude of the shift (average EKS&GK

Groningen)Groningen) EU/US level of labor productivity (ALP)EU/US level of labor productivity (ALP) 1979 1979 1995 1995 20042004

80%80% 97%97% 89%89%

Point of Departure: Post-95 Point of Departure: Post-95

Turnaround Plus New Turnaround Plus New HeterogeneityHeterogeneity This paper begins with two simple This paper begins with two simple

observations:observations:1. While European productivity (Y/H) has fallen 1. While European productivity (Y/H) has fallen

back since 1995 relative to the US, output per back since 1995 relative to the US, output per capita (Y/N) has not fared nearly as badlycapita (Y/N) has not fared nearly as badly

►►Y/H growth gap: 0.9%Y/H growth gap: 0.9%►►Y/N growth gap: 0.2%Y/N growth gap: 0.2%

2. After 1995, we see divergence across the 2. After 1995, we see divergence across the EU-15 in Y/H growthEU-15 in Y/H growth

► ► St. Dev. 1970-1995: 0.62St. Dev. 1970-1995: 0.62► ► St. Dev. 1995-2005: 1.01St. Dev. 1995-2005: 1.01

The Key Identity SuggestsThe Key Identity Suggeststhe Tradeoffthe Tradeoff

An identity links Y/N and Y/H to H/N:An identity links Y/N and Y/H to H/N:Y/N = Y/H * H/NY/N = Y/H * H/N

Thus the paradox of high European Y/H and low Y/N Thus the paradox of high European Y/H and low Y/N must be resolved by lower H/Nmust be resolved by lower H/N

Also, Y/H and H/N are jointly determinedAlso, Y/H and H/N are jointly determined The task of this paper is going to be figure The task of this paper is going to be figure

out which direction the causation runsout which direction the causation runs We will argue that a good deal of the decline in We will argue that a good deal of the decline in

ALP growth is due to exogenous employment ALP growth is due to exogenous employment shocksshocks

Also we will highlight the reversal of almost Also we will highlight the reversal of almost everything at 1995, comparing 1970-95 vs. 1995-everything at 1995, comparing 1970-95 vs. 1995-20052005

Bringing Together the Bringing Together the Disparate LiteraturesDisparate Literatures

Literature #1, why did Europe’s hours per capita Literature #1, why did Europe’s hours per capita (hereafter H/N) decline before 1995? Prescott, (hereafter H/N) decline before 1995? Prescott, Rogerson, Sargent-Lundqvist, Alesina, BlanchardRogerson, Sargent-Lundqvist, Alesina, Blanchard High taxes, regulations, unions, high minimum wagesHigh taxes, regulations, unions, high minimum wages Europe made labor expensiveEurope made labor expensive Movement up Labor Demand curve => low Movement up Labor Demand curve => low

employment + high ALPemployment + high ALP Literature #1 has missed the turnaroundLiterature #1 has missed the turnaround

Since 1995 there has been a decline in tax rates and Since 1995 there has been a decline in tax rates and employment protection measures; unionization earlieremployment protection measures; unionization earlier

Big increase in hours per capita, turnaround in both Big increase in hours per capita, turnaround in both absolute terms and relative to the US Move back absolute terms and relative to the US Move back down Ldown LDD curve curve

The Employment-Productivity The Employment-Productivity TradeoffTradeoff

Take any CRS production F(K,L)Take any CRS production F(K,L) Intensive form, L·F(K/L,1) = L·f(K/L)Intensive form, L·F(K/L,1) = L·f(K/L) Y/L=f(K/L)Y/L=f(K/L)

As long as capital is fixed, an increase As long as capital is fixed, an increase in employment lowers labor in employment lowers labor productivityproductivity

We don’t know how fast capital adjusts We don’t know how fast capital adjusts though; the tradeoff may be though; the tradeoff may be quantitatively small quantitatively small

A major goal of this paper is to A major goal of this paper is to quantify the tradeoffquantify the tradeoff

Textbook Labor Textbook Labor EconomicsEconomics

-2

-1

0

1

2

3

4

5

6

7

1 2 3 4 5 6 7 8 9 10 11

Labor Input

Re

al W

ag

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

B

Pre-1995: Moving Pre-1995: Moving NorthwestNorthwest

1970-95 EU climbs to the northwest1970-95 EU climbs to the northwest Hours per capita decline, average labor Hours per capita decline, average labor

productivity increasesproductivity increases In this sense much of Europe’s 1970-95 In this sense much of Europe’s 1970-95

productivity catchup was “artificial,” productivity catchup was “artificial,” propelled by policies making labor propelled by policies making labor expensiveexpensive No busboys, grocery baggers, valet parkersNo busboys, grocery baggers, valet parkers Product regulations kept stores shut tight Product regulations kept stores shut tight

many hours of the day/nightmany hours of the day/night All this reduced Europe’s employment share All this reduced Europe’s employment share

in retail/services in retail/services

Post-1995: Moving Post-1995: Moving SoutheastSoutheast

1995-2004 EU slides southeast1995-2004 EU slides southeast Hours per capita start increasing while they Hours per capita start increasing while they

decline in the USdecline in the US Effects are magnified by slow reaction of Effects are magnified by slow reaction of

capital, eventually capital should grow faster capital, eventually capital should grow faster offsetting much or all of productivity slowdownoffsetting much or all of productivity slowdown

Literature #1 misses the turnaroundLiterature #1 misses the turnaround Since 1995 decline in tax rates and Since 1995 decline in tax rates and

employment protection measuresemployment protection measures We are unaware of much macro-level research We are unaware of much macro-level research

on the turnaround in hourson the turnaround in hours Allard and Lindert (2006) do not really Allard and Lindert (2006) do not really

mention it – data only goes to 2001mention it – data only goes to 2001

Literature #2: The EU-US Literature #2: The EU-US ALP gapALP gap

Central Focus of Lit #2 on post-1995 Central Focus of Lit #2 on post-1995 turnaround in US Productivity Growthturnaround in US Productivity Growth Jorgenson, Ho and Stiroh (2006): ’95-’00 Jorgenson, Ho and Stiroh (2006): ’95-’00

due to ICT, ’00-’05 something elsedue to ICT, ’00-’05 something else Retail is often notedRetail is often noted

Van Ark, Inklaar and McGuckin (2003)Van Ark, Inklaar and McGuckin (2003) Foster, Haltiwanger and Krizan (2002) on Foster, Haltiwanger and Krizan (2002) on

new establishmentsnew establishments Baily and Kirkegaard (2004) on Baily and Kirkegaard (2004) on

regulationsregulations Need to free land use restrictionsNeed to free land use restrictions

Fully 85% of EU productivity slowdown Fully 85% of EU productivity slowdown has its counterpart in a speed-up of EU has its counterpart in a speed-up of EU H/NH/N Europe paid for lower ALP mainly with Europe paid for lower ALP mainly with

higher hours rather than less consumptionhigher hours rather than less consumption Saltari and Travaglini have made a similar Saltari and Travaglini have made a similar

point with respect to Italypoint with respect to Italy This runs counter to the Blanchard This runs counter to the Blanchard

story about preferences for leisurestory about preferences for leisure Now we hear that they’re not lazy, just Now we hear that they’re not lazy, just

unproductiveunproductive Huge literature on different structural Huge literature on different structural

reasons for EU sclerosisreasons for EU sclerosis

Literature #3: relationship Literature #3: relationship between Y/H and H/Nbetween Y/H and H/N

There is a long line of research examining There is a long line of research examining the relationship between hours and the relationship between hours and productivityproductivity

Even using an IV approach, increases in Even using an IV approach, increases in H/N drive down Y/HH/N drive down Y/H This makes sense in a single factor model or This makes sense in a single factor model or

with any slow adjustment of capitalwith any slow adjustment of capital Measuring the speed of adjustment of Measuring the speed of adjustment of

investment is difficult – future research for usinvestment is difficult – future research for us View today’s talk as a report on research in View today’s talk as a report on research in

progress, not the final polished wordprogress, not the final polished word

Trends in Labor Trends in Labor Productivity Growth, 1970-Productivity Growth, 1970-

20062006

0

1

2

3

4

5

6

1970 1975 1980 1985 1990 1995 2000 2005

Per

cent EU-15 Y/H

US Y/H

Growth Trends in Y/N and Growth Trends in Y/N and H/N,H/N,

1970-20061970-2006

-3

-2

-1

0

1

2

3

4

1970 1975 1980 1985 1990 1995 2000 2005

Perc

ent

US Y/NEU-15 Y/N

US H/N

EU-15 H/N

Growth Trends in E/N,Growth Trends in E/N,1970-20061970-2006

-1

-0.5

0

0.5

1

1.5

2

1970 1975 1980 1985 1990 1995 2000 2005

Per

cent

EU-15 E/N

US E/N

Growth Trend Turnaround Growth Trend Turnaround in in

H/E is less Dramatic, 1970-H/E is less Dramatic, 1970-20062006

-2

-1.5

-1

-0.5

0

0.5

1

1970 1975 1980 1985 1990 1995 2000 2005

Per

cent

US H/E

EU-15 H/E

Interpreting the Post-1995 Interpreting the Post-1995 TurnaroundTurnaround

Simple HP trendsSimple HP trends Europe is continuing its long slow declineEurope is continuing its long slow decline Turnaround is generally pegged at 1995Turnaround is generally pegged at 1995

The EU-15 stops catching up, and the US The EU-15 stops catching up, and the US takes offtakes off

We are mainly going to examine the We are mainly going to examine the determinants of the turnaround – i.e. determinants of the turnaround – i.e. changes in Y/H growth post-1995changes in Y/H growth post-1995

Qualification: US trend peaks in 2002-03 Qualification: US trend peaks in 2002-03 and is now decliningand is now declining

U. S. Productivity Growth U. S. Productivity Growth TrendsTrends

Based on Data to 2007:Q4Based on Data to 2007:Q4

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

NFPB LP

TE LP

NFPB minus TE

We Need to Look at We Need to Look at EverythingEverythingPer CapitaPer Capita

Population growth in EU 0.7 percent per Population growth in EU 0.7 percent per year slower than US over the past year slower than US over the past decadedecade

Output per capita in the EU doesn’t look Output per capita in the EU doesn’t look bad at allbad at all

Post-1995 hours turnaround is a Post-1995 hours turnaround is a counterpart to the Y/H turnaroundcounterpart to the Y/H turnaround

We will see that there is a similar pattern We will see that there is a similar pattern withinwithin the EU – strong negative the EU – strong negative correlation between the hours and ALP correlation between the hours and ALP turnaroundsturnarounds

Turnarounds in Hours and Turnarounds in Hours and OutputOutput

Turnarounds are 1995-2006 minus Turnarounds are 1995-2006 minus 1980-1995 growth1980-1995 growth

The relative turnarounds (EU minus The relative turnarounds (EU minus US) cancel each other outUS) cancel each other out

Y/H + H/N = Y/NY/H + H/N = Y/N

-2.20 1.99 -0.21-2.20 1.99 -0.21 1980-2005 Y/N growth is identical1980-2005 Y/N growth is identical But the EU is not catching upBut the EU is not catching up

US vs EU E/NUS vs EU E/N

0.30

0.35

0.40

0.45

0.50

0.55

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Em

plo

ymen

t-P

op

ula

tio

n R

atio

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

EU

-US

rat

io

US

EU-15

Ratio(Right hand axis)

-2

-1

0

1

2

3

4

5

6

7

1984 1988 1992 1996 2000 2004

US Hours

US CapitalEU Capital

EU Hours

The US has experienced an enormous The US has experienced an enormous decline in hours growth when capital decline in hours growth when capital growth fellgrowth fell Thus “capital-deepening” numbers for US Thus “capital-deepening” numbers for US

are misleading as they reflect as much are misleading as they reflect as much movements in the denominator as in the movements in the denominator as in the numerator.numerator.

Cumulative hours growth zero 2000-06, Cumulative hours growth zero 2000-06, growth in hours per capita negativegrowth in hours per capita negative

The EU had strong hours growth while The EU had strong hours growth while the US went through its recession and the US went through its recession and recoveryrecovery

Defining the Four Country Defining the Four Country Groups, Groups,

Pop Share and ALP Growth Pop Share and ALP Growth 1995-20061995-2006

Nordic: Denmark, Finland, SwedenNordic: Denmark, Finland, Sweden Pop Share: 5Pop Share: 5 ALP: 2.09ALP: 2.09

Anglo-Saxon: UK and IrelandAnglo-Saxon: UK and Ireland Pop Share: 17Pop Share: 17 ALP: 2.18ALP: 2.18

Continental: Benelux, Austria, France, Continental: Benelux, Austria, France, Germany, PortugalGermany, Portugal Pop Share: 49Pop Share: 49 ALP: 1.75 ALP: 1.75

Mediterranean: Greece, Italy, SpainMediterranean: Greece, Italy, Spain Pop Share: 29Pop Share: 29 ALP: 0.24ALP: 0.24

A closer look at the A closer look at the Mediterranean CountriesMediterranean Countries

Mainly driven by Spain and ItalyMainly driven by Spain and ItalySpain:Spain:

►►-4.43 turnaround in Y/H-4.43 turnaround in Y/H►►+5.04+5.04 turnaround in H/N turnaround in H/N

Italy:Italy:►►-2.28-2.28 turnaround in Y/Hturnaround in Y/H►►+1.16 turnaround in H/N+1.16 turnaround in H/N

Had we ranked the countries Had we ranked the countries according to output per capita, Spain according to output per capita, Spain would be a Tiger, behind only Greece would be a Tiger, behind only Greece and Ireland and Ireland

Making Sense of Cross-EUMaking Sense of Cross-EUHeterogeneity in Table 1Heterogeneity in Table 1

Notice the homogeneity pre-1995 and Notice the homogeneity pre-1995 and heterogeneity post-’95. Stdev LP 0.63 to 1.0. heterogeneity post-’95. Stdev LP 0.63 to 1.0. Stdev H/N 0.46 to 1.02 Stdev H/N 0.46 to 1.02

The only two countries with a noticeable The only two countries with a noticeable acceleration in LP are Sweden, Greece and acceleration in LP are Sweden, Greece and IrelandIreland

Declines < 1% for Finland, UK, Austria, Lux, Declines < 1% for Finland, UK, Austria, Lux, NLNL

Sharp declines for Belgium, Denmark, France, Sharp declines for Belgium, Denmark, France, Germany, Portugal, and especially Italy and Germany, Portugal, and especially Italy and SpainSpain

We emphasize the experience of the We emphasize the experience of the Mediterranean countries and their contrast Mediterranean countries and their contrast with Nordic & Anglo-Saxonwith Nordic & Anglo-Saxon

Research StrategyResearch Strategy Divergence across the EU has increasedDivergence across the EU has increased The Y/H slowdown in the Med countries is The Y/H slowdown in the Med countries is

balanced by healthy H/N growth, which balanced by healthy H/N growth, which mainly consists of E/N growthmainly consists of E/N growth

We will estimate regressions that allow us to We will estimate regressions that allow us to determine how much of the turnaround in determine how much of the turnaround in E/N growth can be attributed to E/N growth can be attributed to policy/institutional variablespolicy/institutional variables

Then how much of the productivity slowdown Then how much of the productivity slowdown can be explained by the E/N growth and by can be explained by the E/N growth and by policy variables, separately and together?policy variables, separately and together?

Employment RegressionsEmployment Regressions Cover 1980-2003 EU-15, N=320, Cover 1980-2003 EU-15, N=320,

population weightedpopulation weighted

Explanatory Variables:Explanatory Variables: Output GapOutput Gap Average Replacement Rate (ARR)Average Replacement Rate (ARR) Employment Protection Legislation (EPL)Employment Protection Legislation (EPL) Product Market Regulation (PMR)Product Market Regulation (PMR) Union DensityUnion Density Tax wedgeTax wedge Various dummiesVarious dummies

These are common across this literatureThese are common across this literature

Taxes in EuropeTaxes in Europe

25

27

29

31

33

35

37

39

41

1980 1985 1990 1995 2000

10

15

20

25

30

35

40

45

Anglo-Saxon

(right hand axis)

Continental

Nordic

Mediterranean

Employment Protection Employment Protection LegislationLegislation

0

0.5

1

1.5

2

2.5

3

3.5

4

1980 1985 1990 1995 2000

Anglo-Saxon

Continental

Nordic

Mediterranean

Unemployment BenefitsUnemployment Benefits

0

5

10

15

20

25

30

35

40

45

50

1980 1985 1990 1995 2000

Anglo-Saxon

Continental

Nordic

Mediterranean

OECD Product Market OECD Product Market Regulation IndexRegulation Index

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000

Anglo-Saxon

Continental

Nordic

Mediterranean

Employment Regression Employment Regression ResultsResults Our tax wedge coefficient Our tax wedge coefficient

is consistent with what is consistent with what others have foundothers have found

EPL and PMR seem to EPL and PMR seem to have no effectshave no effects

Everything else has the Everything else has the correct sign – regulations correct sign – regulations and taxes reduce and taxes reduce employmentemployment

The post-1995 dummy is The post-1995 dummy is substantialsubstantial Growth in the Growth in the

employment employment raterate rose rose by 1% after ‘95by 1% after ‘95

Tax Wedge -0.28***(0.07)

Employment 0.86Protection Legislation (0.79)

Product Market -0.44Regulation (0.55)

Unemployment -0.18***Benefits (ARR) (0.05)

Union Density -0.46***(0.10)

High Corporatism Dummy -2.04**(0.98)

Output Gap 0.52***(0.05)

Post-1995 Dummy 0.94(0.15)

R2 0.52N 320RMSE 1.18

Employment Regression Employment Regression ResultsResults

RobustnessRobustness

Results are the same if population Results are the same if population weights are dropped or year dummies weights are dropped or year dummies are addedare added

Dropping the Mediterranean Dropping the Mediterranean countries or Spain does not affect the countries or Spain does not affect the size of the post-1995 dummysize of the post-1995 dummy

Employment Regression Employment Regression ResultsResults

With all of our dummies, we need to With all of our dummies, we need to determine the effects of the determine the effects of the policy/institutional variables holding policy/institutional variables holding constant the country and time dummies. constant the country and time dummies.

We plot predicted values with policy We plot predicted values with policy fixed at its 1995 levelfixed at its 1995 level

The output gap and dummies are still The output gap and dummies are still allowed to varyallowed to vary

35

37

39

41

43

45

47

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Fixed Policy

Predicted

No Post-1995 Dummy

Female EmploymentFemale Employment

Effect of the post-95 dummy (2.38%)

Effect of the Policy variables (1.75%)

50

55

60

65

70

75

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Fixed Policy

Predicted

No Post-1995 Dummy

Male EmploymentMale Employment

Effect of the post-95 dummy (6.32%)

Effect of the Policy variables (1.47%)

Productivity RegressionsProductivity Regressions

Suppose we are in a Cobb-Douglas world. Suppose we are in a Cobb-Douglas world. What coefficient would we expect on What coefficient would we expect on employment?employment?

y = 0.33*k + 0.67*ly = 0.33*k + 0.67*l

(y-l) = 0.33*(k/l)(y-l) = 0.33*(k/l) If capital is fixed, the coefficient will be -0.33If capital is fixed, the coefficient will be -0.33 If capital adjusts it will be smallerIf capital adjusts it will be smaller If labor is not homogenous it could be largerIf labor is not homogenous it could be larger

The last people to enter the labor force are likely The last people to enter the labor force are likely the least skilled and experiencedthe least skilled and experienced

Productivity RegressionsProductivity Regressions

We can’t simply regress productivity We can’t simply regress productivity on employmenton employment

A shock to productivity affects A shock to productivity affects wages and hence employmentwages and hence employment

Productivity RegressionsProductivity Regressions

IdentificationIdentification We want variables that affect employment We want variables that affect employment

but not productivitybut not productivity The tax wedge is our best candidateThe tax wedge is our best candidate We also consider using the post-1995 We also consider using the post-1995

dummy and union densitydummy and union density PragmatismPragmatism This gives more power and passes identification This gives more power and passes identification

tests, but raises the question as to what caused tests, but raises the question as to what caused the post-1995 change as quantified by the the post-1995 change as quantified by the dummydummy

Productivity RegressionsProductivity Regressions Tax wedge is the only Tax wedge is the only

instrument in this versioninstrument in this version Coefficient on employment Coefficient on employment

is twice what we would is twice what we would expectexpect

EPL and ARR have EPL and ARR have independent positive independent positive effects on productivityeffects on productivity

We can drive the SE on We can drive the SE on employment down to 0.10, employment down to 0.10, but the result remains the but the result remains the samesame

Not dependent on Med.Not dependent on Med.

Employment Rate -0.64***(0.20)

Employment 1.66***Protection Legislation (0.65)

Product Market 0.56Regulation (0.45)

Unemployment 0.14***Benefits (ARR) (0.05)

Union Density 0.03(0.12)

High Corporatism Dummy -0.49(0.94)

Output Gap 0.68***(0.11)

Post-1995 Dummy -0.14(0.24)

R2 0.63N 320RMSE 0.95

88

90

92

94

96

98

100

102

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Predicted

Fixed Policy

Level of Labor Level of Labor ProductivityProductivity

Policy Effect– Lowered growth by .25% per year

– cumulates to 2.5% decline in the level

– 1/3 of the total shortfall

Effects of the Policy and Effects of the Policy and Institutional VariablesInstitutional Variables

Assuming hours per employee is Assuming hours per employee is stable, E/N + Y/H = Y/Nstable, E/N + Y/H = Y/N

Policy has effects on both Policy has effects on both employment and productivityemployment and productivity

We just add these effects upWe just add these effects up

Effects of Policy & Effects of Policy & InstitutionsInstitutions

Tax wedge and union density lower Y/NTax wedge and union density lower Y/N ARR and EPL have ARR and EPL have positivepositive effects effects

Driven by their direct effects on productivityDriven by their direct effects on productivity

Shock Size

Tax Wedge 9.21 -2.67*** 1.71*** -0.96 **(0.64) (0.53) (0.4)

Employment 0.87 0.74** 0.23 0.97 ***Protection Legislation (0.36) (0.37) (0.31)

Product Market 0.9 -0.14 0.35 0.21Regulation (0.24) (0.25) (0.22)

Unemployment 11.31 -0.90*** 1.37*** 0.47 *Benefits (ARR) (0.34) (0.31) (0.25)

Union Density 23.32 -7.93*** 5.07*** -2.85 ***(1.17) (1.23) (1.07)

High Corpratism Dummy 1 -1.02** 0.65** -0.37 *(0.48) (0.33) (0.21)

Output Per CapitaProductivityEmployment

Effects of Government Effects of Government PolicyPolicy

Why would ARR and EPL Why would ARR and EPL raiseraise productivity and output?productivity and output? Acemoglu and Shimer on reservation Acemoglu and Shimer on reservation

wages and matchingwages and matching Match quality may improveMatch quality may improve More incentive to create job-specific More incentive to create job-specific

human capitalhuman capital

The New Results in thisThe New Results in thisPaper at the Industry LevelPaper at the Industry Level

We aggregate productivity growth by We aggregate productivity growth by industry in a way that allows us to determine industry in a way that allows us to determine the relative role of productivity and sharesthe relative role of productivity and shares

The “productivity” effect is just the difference The “productivity” effect is just the difference in productivity growth in a given industryin productivity growth in a given industry

The “share” effect is the addition or The “share” effect is the addition or subtraction from growth as shares shift subtraction from growth as shares shift within industries.within industries. Example: Ireland shifts to high tech Example: Ireland shifts to high tech

manufacturing, this comes out as a “share” effect manufacturing, this comes out as a “share” effect within manufacturingwithin manufacturing

Contributions, Productivity vs. Contributions, Productivity vs. Share Effects, in EU-US, 1995-Share Effects, in EU-US, 1995-

20032003

-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2

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 importantas retail

But ICT is tinyOnly ~2% hours share

ALP growth multiplied by nominal sharesALP growth multiplied by nominal shares

-0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5

Real Estate

Communications

Services

Finance

Transportation

Retail/Wholesale

Manufacturing

Construction Utilities

Farms/Mining

U.S.

E.U.

US acceleration is widespread, not just in retailand manufacturing.

EU weakness is also widespread

Cross-Industry Correlation Cross-Industry Correlation ofof

Y/H and E/N TurnaroundsY/H and E/N Turnarounds

-10

-5

0

5

10

15

-15 -10 -5 0 5 10 15

Y/H Turnaround (Percent)

E/N

Turn

arou

nd (P

erce

nt)

▲ = ICT or Communications

■ = Med. (non-ICT or Comm)

Table 12: Table 12: Regressions of LP Turnaround* on E/N Turnaround*

Countries

Exclude ICT and Comm.

Coefficient

T-Statistic N R2 RMSE

All No -0.45 -4.35 179 0.10 3.000

All Yes -0.54 -5.94 149 0.19 2.495

Mediterranean Only No -0.82 -4.19 36 0.34 2.920

Mediterranean Only Yes -0.83 -5.60 30 0.53 2.140

* Turnaround equals 1995-2004 average growth minus 1980-1995 average growth

Comparing Nordic with Comparing Nordic with EU-15EU-15

Nordic

Business Services

Retail/

Wholesale

ICT

Mfg.

Finance

Real Estate

Nondurable

Mfg

Non-ICT Durable

Mfg.Construction/

Utilities

Trans

Ag./Mining

Communication

GHI-0.05

-0.15

0.1

0.2

0.05 0.10

Comparing Anglo-Saxon Comparing Anglo-Saxon with EU-15with EU-15

Anglo-Saxon

-0.10

0.05

0.15

0.25

0.05

Business

Services

Retail/

Wholesale

ICT Mfg.

Finance

Real Estate

Nondurable Mfg.

Non-ICT Durable Mfg.

Construction/Utilities

Trans Ag./Mining

Communication

GHI

Comparing Continental Comparing Continental with EU-15with EU-15

Continental

Retail/

Wholesale

ICT Mfg.

Finance

Real Estate

Nondurable Mfg.

Non-ICT Durable

Mfg.

Construction/

Utilities

Trans

Ag./Mining

Communication

GHI

Business

Services

0.10

0.05

-0.05

-0.15

Comparing Med with EU-Comparing Med with EU-1515

Mediterranean

Business

Services

Retail/

Wholesale

ICT

Mfg.

Finance

Real Estate

Nondurable Mfg

Non-ICT Durable

Mfg.

Construction/

UtilitiesTrans.

Ag./Mining

Communication

GHI

-0.10 0.05

0.05

-0.15

0.15

-0.25

0.10

Comparing US with EU-Comparing US with EU-1515

EU TFP

US T

FP Business

Services

Retail/

Wholesale

ICT

Mfg.

Finance

45º line

Real Estate

Nondurable

Mfg

Non-ICT Durable

Mfg.

GHI

Construction/

Utilities

Trans.

Ag./Mining

Communication

0.05

0.35

0.25

0.05

-0.05

-0.05 0.10

Conclusions from Conclusions from Employment Employment

and Productivity Growth and Productivity Growth RegressionsRegressions Growing heterogeneity with EU-15 in employment and Growing heterogeneity with EU-15 in employment and

productivity growth after 1995.productivity growth after 1995. There is a strong negative correlation between growth in Y/H There is a strong negative correlation between growth in Y/H

and E/N evident in the data, emerging from our regressions, and E/N evident in the data, emerging from our regressions, and also in the cross-industry data displayed at the endand also in the cross-industry data displayed at the end

At least in short run, lower taxes and looser regulations raise At least in short run, lower taxes and looser regulations raise employment growth and reduce productivity growthemployment growth and reduce productivity growth

The novelty in our framework is to show that policy changes The novelty in our framework is to show that policy changes widely endorsed in Europe as desirable (Lisbon agenda) may widely endorsed in Europe as desirable (Lisbon agenda) may boost E/N at the cost of reducing Y/H, thus leaving boost E/N at the cost of reducing Y/H, thus leaving ambiguous effects on growth in output per capita (Y/N)ambiguous effects on growth in output per capita (Y/N)

A 1% increase in employment only raises output by 0.36% in A 1% increase in employment only raises output by 0.36% in the short-runthe short-run

Summary of effectsSummary of effects Unions reduce output per capitaUnions reduce output per capita EPL and unemployment benefits raise output per capitaEPL and unemployment benefits raise output per capita PMR and the tax wedge have roughly no effectsPMR and the tax wedge have roughly no effects

Further Conclusions from Further Conclusions from Cross-Industry ResultsCross-Industry Results

Differences across Europe are in part Differences across Europe are in part reflected in industries that are “national reflected in industries that are “national champions”. Compared to EU average, LP champions”. Compared to EU average, LP turnaround revealsturnaround reveals Nordic strong in ICT manufacturingNordic strong in ICT manufacturing Anglo-Saxon strong in finance and business Anglo-Saxon strong in finance and business

servicesservices Continental average as would be expectedContinental average as would be expected Mediterranean weak across the board, Mediterranean weak across the board,

consistent with a broad-based macro consistent with a broad-based macro explanation rather than an industry-specific explanation rather than an industry-specific explanationexplanation

Final QualificationFinal Qualification The E/N and Y/H regression analysis is static The E/N and Y/H regression analysis is static

and does not trace further dynamic and does not trace further dynamic adjustmentadjustment Negative effect of policy reforms on K/H should in Negative effect of policy reforms on K/H should in

many models be followed by faster growth in Kmany models be followed by faster growth in K This has not happened (yet) in much of EuropeThis has not happened (yet) in much of Europe

There are fundamental differences in industry There are fundamental differences in industry performance between the US and EU that performance between the US and EU that have widely accepted structural explanationshave widely accepted structural explanations Wholesale and retail trade, big boxes vs. inner-city Wholesale and retail trade, big boxes vs. inner-city

pedestrian walking districts (role of land-use pedestrian walking districts (role of land-use planning as another policy reform)planning as another policy reform)