the productivity puzzle: why improving labour productivity is critical ... · the productivity...

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


Labour productivity: a simple framework

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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).


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.


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).


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).


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.


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.


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

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19

97

19

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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




Europe: post-Crisis unemployment rates (2008-2016)

50

100

150

200

250

300

2008 2009 2010 2011 2012 2013 2014 2015 2016


Unemployment rates (2008-2016). 2008=100. Source: OECD.


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).


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).


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.


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.


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.


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.


Total Factor Productivity (1990-2014)

85

90

95

100

105

19

90

19

91

19

92

19

93

19

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19

95

19

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19

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20

08

20

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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.


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).


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


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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