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THE END OF CONVERGENCE:MARKET SERVICES PRODUCTIVITY IN

EUROPE

Robert Inklaar, Marcel Timmer and Bart van Ark

Groningen Growth and Development Centre, University of Groningen

This paper is written as part of the “EU KLEMS project on Growth and Productivity in the European Union”. This project is funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, "Policy Support and Anticipating Scientific and Technological Needs".

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Convergence norm in post-war period

Standard deviation across countries of GDP per capita relative to the leading country, 1870-2000

0.00

0.05

0.10

0.15

0.20

0.25

0.30

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Post-war period

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But no more since mid-1990s

Standard deviation across countries of GDP per hour relative to the leading country, 1950-2006

0.00

0.05

0.10

0.15

0.20

0.25

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

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Main findings

Convergence has stopped in Europe and between EU and US in mid-1990s

Market services important source Skills, ICT and regulation are not the

source of this divergence Technology transfer in services still not

well understood

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Market services important source of divergence

Contribution of market services and other industries* to market economy labour productivity growth in Europe and US, 1995-2004

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

FIN US GBR AUT FRA NLD BEL GER DNK ITA ESP

Other industries Market services*other industries also includes the contribution from reallocation of

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Data on MFP growth and levels

Use MFP growth from EU KLEMS Use output PPPs and labour and capital

data to come up with input PPPs (45xII, 2xL, 6xK)

Multilateral MFP level comparison for 1997, extrapolated using relative growth

Look at MFP level relative to the leading country

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And also break in convergence

Standard deviation of MFP levels relative to the leading country, average across market services, 1980-2004

0.14

0.16

0.18

0.20

0.22

0.24

0.26

0.28

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More formal analysis

iFi MFPMFPMFP lnln

iFiFi MFPMFPZZMFPMFPMFP lnlnln

Positive: convergence

Innovation Imitation

Unconditional convergence:

Conditional convergence:

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Unconditional convergence stopped

Explaining MFP growth by the MFP level gap relative to the frontier1980-2004 1980-1995 1995-2004

Annual MFP growth 0.020*** 0.033*** -0.009*(0.004) (0.005) (0.005)

Period-average MFP growth 0.017*** 0.027*** -0.008(0.004) (0.003) (0.007)

• Country, industry and year dummies included

• MFP gap lagged once

• Same picture for later break years

• Period-average MFP growth => insensitive to MFP measures

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Human capital: some effect on convergence?

Human capitalVariable PeriodShare of high-skilled workers 1980-2004 0.015*** (0.004) -0.045* (0.025) 0.002 (0.022)

1980-1995 0.024*** (0.005) -0.068*** (0.020) 0.013 (0.020)1995-2004 0.002 (0.006) 0.015 (0.044) -0.076 (0.049)

Change in labour composition 1980-2004 0.015*** (0.005) -0.632 (0.553) 0.507 (0.897)1980-1995 0.023*** (0.004) -0.631* (0.334) 1.151* (0.668)1995-2004 -0.001 (0.007) -0.128 (0.539) -2.652** (1.046)

MFP gap ( ) Variable ( ) Variable*MFP gap ( )

• After 1995: closer to the frontier => more impact from human capital

• No effect on innovation

• Not consistent across measures, sensitive to break year

• At best partial explanation

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Regulation: conflicting evidence for earlier period

RegulationVariable PeriodRegulatory impact 1980-2004 0.024** (0.011) 0.008 (0.012) -0.021 (0.024)

1980-1995 0.041*** (0.007) 0.012 (0.010) -0.038*** (0.014)1995-2004 -0.025 (0.018) -0.026 (0.017) 0.045 (0.040)

Change in regulatory impact 1980-2004 0.019*** (0.005) -0.231 (0.169) 0.218 (0.152)1980-1995 0.030*** (0.004) -0.148 (0.135) 0.469*** (0.136)1995-2004 -0.012 (0.009) -0.286* (0.170) 0.017 (0.336)

MFP gap ( ) Variable ( ) Variable*MFP gap ( )

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ICT: no additional impact on MFP

ICT and organzational capitalVariable PeriodGrowth of ICT capital services 1980-2004 0.003 (0.007) -0.046 (0.041) 0.104** (0.042)

1980-1995 0.022*** (0.007) -0.035 (0.037) 0.036 (0.042)1995-2004 -0.026** (0.012) -0.060 (0.042) 0.136* (0.069)

Contribution of ICT to growth 1980-2004 0.017*** (0.005) -0.381 (0.538) -0.056 (0.803)1980-1995 0.029*** (0.005) 0.006 (0.478) -0.496 (0.877)1995-2004 -0.003 (0.009) -1.039* (0.536) -1.229 (1.093)

MFP gap ( ) Variable ( ) Variable*MFP gap ( )

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Conclusions

End of convergence, but why? Technology transfer in manufacturing

R&D + skills (Griffith et al., 2004) Technology transfer in services

Organizational change, management practices?

How to find out? Measurement of intangibles