Understanding the Post-Understanding the Post-1995 Productivity 1995 Productivity

Turnaround Turnaround between Europe and the between Europe and the

USUSRobert J. GordonRobert J. Gordon

Northwestern University, NBER, CEPRNorthwestern University, NBER, CEPR1414thth Dubrovnik Economic Conference Dubrovnik Economic ConferenceSponsored by Croatian National BankSponsored by Croatian National Bank

Dubrovnik, Croatia, June 26, 2008Dubrovnik, Croatia, June 26, 2008

What is Europe?What is Europe?

Throughout “Europe” refers to the Throughout “Europe” refers to the EU-15, not the EU-25EU-15, not the EU-25

Initially the presentation compares Initially the presentation compares EU-15 as a whole to the U. S.EU-15 as a whole to the U. S.

The second session divides up the EU-The second session divides up the EU-15 into country groups divided by 15 into country groups divided by geographygeography

Time periods: Initial reference to Time periods: Initial reference to post-1970, most of presentation post-1970, most of presentation compares 1980-95 with 1995-2005compares 1980-95 with 1995-2005

Outline of the TalkOutline of the Talk Focus on post-1995 EU Turnaround vs. the USFocus on post-1995 EU Turnaround vs. the US

Productivity growth has slowed downProductivity growth has slowed down Employment per capita growth has speeded upEmployment per capita growth has speeded up

In which Industries has EU Productivity In which Industries has EU Productivity Faltered, comparing country groups and EU Faltered, comparing country groups and EU vs. US?vs. US?

Is there a Tradeoff between Employment and Is there a Tradeoff between Employment and Productivity?Productivity? Channels from policy and institutions to E/NChannels from policy and institutions to E/N Cultural changes in female LFPRCultural changes in female LFPR Contribution of employment turnaround to Contribution of employment turnaround to

productivity turnaroundproductivity turnaround Good news vs. bad news conclusionGood news vs. bad news conclusion

Session #2:Session #2: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 Slowdown in productivity growth to well below the U. S. rateU. S. rate

Increase in growth of employment per capita at Increase in growth of employment per capita at well above the U. S. ratewell above the U. S. rate

Are these connected causally or just a Are these connected causally or just a coincidence?coincidence? If connected, which way does the causation go?If connected, which way does the causation go?

Co-authored with Ian Dew-BeckerCo-authored with Ian Dew-Becker Look him up on googleLook him up on google

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 Notational identity: Y/N ≡ Y/H * H/NNotational identity: Y/N ≡ Y/H * H/N

This paper begins with two simple observations:This paper begins with two simple observations:1. While European productivity (Y/H) has fallen back 1. While European productivity (Y/H) has fallen back

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

►►Y/H growth rate US - EU: 0.9%Y/H growth rate US - EU: 0.9%►►Y/N growth rate US - EU: 0.2%Y/N growth rate US - EU: 0.2%

2. A second theme: after 1995, we see divergence across 2. A second theme: after 1995, we see divergence across the EU-15 in Y/H growththe EU-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

3. Even greater increase in standard deviation of H/N 3. Even greater increase in standard deviation of H/N and Y/N growthand Y/N growth

The Key Identity SuggestsThe Key Identity Suggeststhe Tradeoffthe Tradeoff

Returning to our identity:Returning to our identity:Y/N = Y/H * H/NY/N = Y/H * H/N

The The level level of EU relative to US Y/H was much higher of EU relative to US Y/H was much higher than Y/N in both 1995 and 2004.than Y/N in both 1995 and 2004.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 out The task of this paper is going to be figure out

which direction the causation runswhich 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 Y = F(K,H)Take any CRS production Y = F(K,H) Intensive form Y/H=f(K/H)Intensive form Y/H=f(K/H)

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

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1 2 3 4 5 6 7 8 9 10 11

Labor Input

Re

al W

ag

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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 market regulations kept stores shut Product market regulations kept stores shut

tight many hours of the day/nighttight many 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 decline in Hours per capita start increasing while they decline in

the USthe US Effects are magnified by slow reaction of capital.Effects are magnified by slow reaction of capital.

Depending on the model, expanded employment should Depending on the model, expanded employment should eventually stimulate growth of capital, shifting the labor eventually stimulate growth of capital, shifting the labor demand curve up and eliminating much of the productivity demand curve up and eliminating much of the productivity decline decline

Literature #1 misses the turnaround in hoursLiterature #1 misses the turnaround in hours Since 1995 decline in tax rates and employment Since 1995 decline in tax rates and employment

protection measuresprotection measures We are unaware of much macro-level research on the We are unaware of much macro-level research on the

turnaround in hoursturnaround in hours

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 due to Jorgenson, Ho and Stiroh (2006): ’95-’00 due to

ICT, ’00-’05 something elseICT, ’00-’05 something else Retail is often noted: contrast between big boxes Retail is often noted: contrast between big boxes

at highway intersections in US vs. inner city at highway intersections in US vs. inner city pedestrian districts in EUpedestrian districts in EU

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

establishmentsestablishments Baily and Kirkegaard (2004) on product market Baily and Kirkegaard (2004) on product market

regulationsregulations Need to free land use restrictionsNeed to free land use restrictions Restrictions on shop-closing hoursRestrictions on shop-closing hours

Fully 85% of EU productivity Fully 85% of EU productivity slowdown has its counterpart in a slowdown has its counterpart in a speed-up of EU H/Nspeed-up of EU H/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

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

Increases in H/N drive down Y/HIncreases in H/N drive down Y/H This makes sense in a single factor model or with any This makes sense in a single factor model or with any

slow adjustment of capitalslow adjustment of capital Measuring the speed of adjustment of investment is Measuring the speed of adjustment of investment is

difficult difficult This tradeoff idea was first proposed as an explanation This tradeoff idea was first proposed as an explanation

of slow productivity growth in the US during 1973-95of slow productivity growth in the US during 1973-95 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 You’ll find the complete text as a CEPR DP February You’ll find the complete text as a CEPR DP February

20082008

Our First Look at the Our First Look at the DataData

EU-15 vs. USEU-15 vs. US Hodrick-Prescott filtered, not actual Hodrick-Prescott filtered, not actual

growth ratesgrowth rates Expanding the identityExpanding the identity

Y/N ≡ Y/H * H/NY/N ≡ Y/H * H/N

H/N ≡ H/E * E/NH/N ≡ H/E * E/N

Combine:Combine:

Y/N ≡ Y/H * H/E * E/NY/N ≡ Y/H * H/E * E/N

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

What to Notice About LPWhat to Notice About LP The EU Slowdown is steady and continuousThe EU Slowdown is steady and continuous The US post-1995 revival is looking The US post-1995 revival is looking

increasingly temporaryincreasingly temporary We created the US trend from quarterly data We created the US trend from quarterly data

through 2007, not just the annual data through through 2007, not just the annual data through 2004 used by EU-KLEMS2004 used by EU-KLEMS

The fact that the US trend is turning around The fact that the US trend is turning around is important for interpretations of what is important for interpretations of what caused the post-1995 US revivalcaused the post-1995 US revival

That’s a separate paper. Today we That’s a separate paper. Today we primarily look inside Europe and exclude primarily look inside Europe and exclude the US from the employment and the US from the employment and productivity regressionsproductivity regressions

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

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

1970-20061970-2006

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1970 1975 1980 1985 1990 1995 2000 2005

Perc

ent

US Y/NEU-15 Y/N

US H/N

EU-15 H/N

Comments about H/N Comments about H/N and Y/Nand Y/N

Importance of expressing everything per capitaImportance of expressing everything per capita Average EU population growth 0.7 percent per year Average EU population growth 0.7 percent per year

slower than USslower than US EU Growth in H/N strongly negative pre-1995, EU Growth in H/N strongly negative pre-1995,

US strongly positiveUS strongly positive Falling level of H/N in Europe is what Prescott Falling level of H/N in Europe is what Prescott

and others have been trying to explainand others have been trying to explain Productivity and employment turnarounds cancel Productivity and employment turnarounds cancel

out. Growth in Y/N almost equal 1980-2005out. Growth in Y/N almost equal 1980-2005 EU 1.92 percent per year, US 1.97 percent per yearEU 1.92 percent per year, US 1.97 percent per year

But EU is at only 70-75 percent of US level and is But EU is at only 70-75 percent of US level and is not catching upnot catching up

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

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-0.5

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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

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-1.5

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0.5

1

1970 1975 1980 1985 1990 1995 2000 2005

Per

cent

US H/E

EU-15 H/E

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 – a strong negative the EU – a 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) almost cancel each other out for US) almost cancel each other out for Y/NY/N

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 up from its But the EU is not catching up from its

levellevel ratio of 70 percent ratio of 70 percent

US vs EU E/NUS vs EU E/N

0.30

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

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EU-15

Ratio(Right hand axis)

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 Italy

Spain: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 according to Had we ranked the countries according to

their post-1995 annual growth rates of their post-1995 annual growth rates of output per capita, Spain would be a Tiger, output per capita, Spain would be a Tiger, behind only Greece and Ireland behind only Greece 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, population Cover 1980-2003 EU-15, N=320, population

weightedweighted All variables are rates of changes, not levelsAll variables are rates of changes, not levels Explanatory Variables:Explanatory Variables:

Output GapOutput Gap Product Market Regulation (PMR)Product Market Regulation (PMR) Union Density Union Density Employment Protection Legislation (EPL)Employment Protection Legislation (EPL) Average Replacement Rate (ARR)Average Replacement Rate (ARR) Corporatism DummyCorporatism Dummy Tax wedgeTax wedge Dummies for time shift and for each countryDummies for time shift and for each country

Previous literature – a subset of these variables, Previous literature – a subset of these variables, levels vs. growth rateslevels vs. growth rates

OECD Product Market OECD Product Market Regulation IndexRegulation Index

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1980 1985 1990 1995 2000

Anglo-Saxon

Continental

Nordic

Mediterranean

Employment Protection Employment Protection LegislationLegislation

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1980 1985 1990 1995 2000

Anglo-Saxon

Continental

Nordic

Mediterranean

Unemployment BenefitsUnemployment Benefits

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1980 1985 1990 1995 2000

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Continental

Nordic

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Taxes in EuropeTaxes in Europe

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Anglo-Saxon

(right hand axis)

Continental

Nordic

Mediterranean

Employment Regression Employment Regression ResultsResultsOutput Gap 0.52 ***

(0.05)

Product Market -0.44Regulation (0.55)

Union Density -0.46 ***(0.10)

Employment 0.86Protection Legislation (0.79)

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

High Corpratism Dummy -2.04**(0.98)

Tax Wedge -0.28***(0.07)

Post-1995 Dummy 0.94 ***(0.15)

R2 0.52RMSE 1.18N 320

Our tax wedge coefficient is Our tax wedge coefficient is consistent with what others consistent with what others have found, -0.3 to -0.45have found, -0.3 to -0.45

EPL and PMR seem to have EPL and PMR seem to have no significant effectsno significant 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 by rose by 1% after ’95 for 1% after ’95 for unexplained reasonsunexplained reasons

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

Interpretation of Time Shift Interpretation of Time Shift DummyDummy

In mid-1980s there was an enormous In mid-1980s there was an enormous disparity in E/N for females across European disparity in E/N for females across European countries, ranging from 30 percent in Spain countries, ranging from 30 percent in Spain to 70 percent in Scandinaviato 70 percent in Scandinavia

Gradually, but especially after 1995, there Gradually, but especially after 1995, there has been entry of females into the labor has been entry of females into the labor force, esp. in Southern Europeforce, esp. in Southern Europe

A separate literature documents these facts A separate literature documents these facts and links them to changes in cultural and links them to changes in cultural attitudes and social norms.attitudes and social norms.

Post-1995 immigration has also contributed Post-1995 immigration has also contributed to the post-1995 time-shift dummyto the post-1995 time-shift dummy

Employment vs. productivity effectsEmployment vs. productivity effects

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.

To calculate effects of the policy/institutional To calculate effects of the policy/institutional variables, we run counter-factual variables, we run counter-factual simulations. We plot predicted values with simulations. We plot predicted values with policy fixed at its 1995 levelpolicy fixed at its 1995 level

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

Note: These plots convert growth rates to Note: These plots convert growth rates to levelslevels

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. What Suppose we are in a Cobb-Douglas world. What

coefficient would we expect on employment? coefficient would we expect on employment? (Here we neglect the distinction between H and E (Here we neglect the distinction between H and E and use lower case letters for logs) and use lower case letters for logs)

y = 0.33*k + 0.67*hy = 0.33*k + 0.67*h

(y-h) = 0.33*(k/h)(y-h) = 0.33*(k/h) If capital is fixed, the coefficient will be -0.33 and If capital is fixed, the coefficient will be -0.33 and

if capital adjusts, it would be smallerIf labor is not if capital adjusts, it would be smallerIf labor is not homogenous it could be largerhomogenous it could be larger The last people to enter the labor force are likely the The last people to enter the labor force are likely the

least skilled and experienced. This is especially true least skilled and experienced. This is especially true when unskilled immigration occurswhen unskilled immigration occurs

Productivity RegressionsProductivity Regressions Our aim is to regress changes in productivity Our aim is to regress changes in productivity

on changes in employment per capita and on on changes in employment per capita and on our policy/institutional variables.our policy/institutional variables.

This allows us to determine which variables This allows us to determine which variables affect productivity directly, and which others affect productivity directly, and which others only indirectly through their effects on only indirectly through their effects on employmentemployment

We can’t simply regress productivity on We can’t simply regress productivity on employmentemployment

A shock to productivity affects wages and A shock to productivity affects wages and hence employment. Alternatively, a hence employment. Alternatively, a technology shock that raises productivity may technology shock that raises productivity may lead to layoffs of workers who are no longer lead to layoffs of workers who are no longer neededneeded

Instrumental Variables in Instrumental Variables in the Productivity the Productivity

RegressionsRegressionsIdentification using Instrumental Identification using Instrumental

VariablesVariables 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 dummythe post-1995 change as quantified by the dummy

Productivity RegressionsProductivity Regressions Coefficients on policy/inst Coefficients on policy/inst

variables on productivity are variables on productivity are expected to be positive, the expected to be positive, the opposite of the negative opposite of the negative coefficients in the coefficients in the employment regressionsemployment regressions

Tax wedge is the only Tax wedge is the only instrument in this versioninstrument in this version

Coefficient on employment is Coefficient on employment is twice what we would expecttwice what we would expect

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

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

Not dependent on the Med Not dependent on the Med group of countriesgroup of countries

Employment Rate -0.64***(0.20)

Output Gap 0.68***(0.11)

Product Market 0.56Regulation (0.45)

Union Density 0.03(0.12)

Employment 1.66***Protection Legislation (0.65)

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

High Corpratism Dummy -0.49(0.94)

Post-1995 Dummy -0.14(0.24)

R2 0.63RMSE 0.95N 320

88

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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 Employment Productivity Output Per CapitaProduct Market 0.9 -0.14 0.35 0.21Regulation (0.24) (0.25) (0.22)

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

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

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

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

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

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

The industry analysis examines both EU vs. The industry analysis examines both EU vs. US and as well contrasts among the four EU US and as well contrasts among the four EU country groupscountry groups

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 and The E/N and Y/H regression analysis is static and

does not trace further dynamic adjustmentdoes not trace further dynamic adjustment Negative effect of policy reforms on K/H should in many Negative effect of policy reforms on K/H should in many

models be followed by faster growth in Kmodels 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 have performance between the US and EU that have widely accepted structural explanationswidely 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 planning pedestrian walking districts (role of land-use planning as another policy reform)as another policy reform)

Other industries, such as finance and business services, Other industries, such as finance and business services, require further study and may involve data require further study and may involve data comparability issues.comparability issues.