Slowdown in European Productivity Growth by Powerpoint

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									      The Slowdown in European
    Productivity Growth: A Tale of
    Tigers, Tortoises, and Textbook
           Labor Economics
                 Ian Dew-Becker, NBER
and Robert J. Gordon, Northwestern University and NBER
                NBER Summer Institute
      Macroeconomics and Productivity Workshop
                      July 20, 2006
                  The US Accelerates,
                  Europe Decelerates
   From 1950 to 1995 EU productivity growth was faster
    than in the US
   But in the past decade since 1995 we have witnessed
       An explosion in US productivity growth
       A slowdown in EU productivity growth equal in size
       An explosion in research on the US takeoff and but much less
        research on Europe‟s slowdown
   The magnitude of the shift
       EU/US level of labor productivity (ALP)
       1979            1995           2004
        77%             94%            85%
            Bringing Together the
           Two Disparate Literatures
   Literature #1, why did Europe‟s hours per capita
    decline (hereafter H/N)
       High taxes, regulations, high minimum wages
       Europe made labor expensive
       Movement up Labor Demand curve => low employment +
        high ALP
   Literature #1 misses the turnaround
       Since 1995 decline in tax rates and employment protection
        measures
       Big increase in hours per capita, turnaround in both absolute
        terms and relative to the US Move back down LD curve
            Literature #2 on EU-US
            Productivity Growth Gap
   Central Focus of Lit #2 on post-1995
    turnaround
   Since 1995 EU H/N has grown faster than US
   Fully 85% of EU productivity slowdown has its
    counterpart in a speed-up of EU H/N
       Europe paid for lower ALP mainly with higher
        hours rather than less consumption
          Primary Attention in Lit #2:
               The US Revival
   TFP accounts for most of the ALP gap, capital-
    deepening relatively little
       ICT production TFP explains a relatively small share of EU-
        US difference
       Most of the difference is TFP in ICT-using industries
       Of these, the most important are:
            Wholesale trade
            Retail trade
            Financial/securities
   Caveat – Groningen definition of ICT-Use is obsolete,
    retail is not ICT-intensive (See Stiroh 2006)
              Textbook Labor
              Economics
                     7



                     6
                                                                                          High-Cost Labor
                             Labor Demand                                                 Supply Curve
                             Curve
                     5



                     4


            (W/P)0                                                A
Real Wage




                     3
            (W/P)1                                                                                          Low-Cost
                                                                                     B                      Labor
                                                                                                            Supply Curve
                     2



                     1



                     0


                                      Downward shift in labor
                 -1                   supply curve reduces real
                                      wage and productivity

                 -2
                         1        2           3          4         5       6         7        8        9       10          11
                                                                  N0                 N1

                                                                       Labor Input
         The Labor Demand Curve
   1970-95 EU climbs to the left
       Hours per capita decline, average labor productivity increases
       In this sense much of Europe‟s 1970-95 productivity catchup
        was “artificial,” propelled by policies making labor expensive
            No busboys, grocery baggers, stores open less, no valets…
   1995-2004 EU slides right
       Hours per capita start increasing while they decline in the US
       Effects are magnified by slow reaction of capital
            This Paper: There is
          Another Half to the Puzzle
   The EU-US “turnaround” is the 1995-2004 US
    acceleration minus the EU deceleration
   About 1/3 of the turnaround represents
    Europe‟s deceleration, the rest the US
    acceleration
   Almost none of the literature on the EU
    productivity slowdown relates it to the slide
    down the labor demand curve.
       Exception: recent paper by Saltari-Travaglini
          ALP Growth, 1981-2004
          3.5




          3.0


                                                U.S. Output per Hour
                  E.U. Output Per Hour
          2.5




          2.0
Percent




          1.5




          1.0




          0.5




          0.0
           1981         1986             1991   1996                   2001
      Output vs. Hours
4
                                                            We use a parameter of 1600 rather
                              US Output per Capita          than 6400, so we’re picking up business
                                                            cycle level movements
3
                                              EU-15 Output per Capita



2




1
                   US Hours per Capita


0




-1

                                   EU-15 Hours per Capita

-2

            EU-US population growth is fairly constant (~.7%)

-3
     1981                 1986                       1991               1996            2001
               Turnaround in TFP Growth
               but not Capital
          6




          5
                                          U.S Capital Input per Capita


          4
Percent




          3
               E.U. Capital Input per Capita


          2
                            E.U. Total Factor Productivity


          1




          0
                                                             U.S. Total Factor Productivity



          -1
               1981                     1986                    1991                     1996   2001
    6
             As in JHS, we know this is mainly due
             to movements in hours, not capital
    5

                                                       U.S. Capitital Deepening
                 E.U. Capital Deepening

    4
Percent




    3




    2

            Since 2000, productivity is not driven by investment
            Rather, by TFP growth and hours decline
    1




    0
     1981                1986             1991               1996                 2001
  Defining Tigers and Tortoises,
Pop Shares and Private ALP Growth

   Tigers: Ireland, Finland, Greece
       Pop Share: 5%         ALP 4.79%
   Middle: Sweden, Austria, UK, Germany,
    Portugal, France
       Pop Share: 61%        ALP: 2.45%
   Tortoises: Belgium, Netherlands, Denmark,
    Luxembourg, Spain, Italy
       Pop Share: 34%        ALP: 0.72%
         Within EU, big change from
        homogeneity to heterogeneity
   Standard deviation of ALP growth rates across 15
    countries, 0.80 1979-95 to 1.23 1995-2004.
   Mainly accounted for by non-ICT TFP
       Tortoises actually have negative non-ICT TFP growth
            Spain and Italy are negative overall
   Where is this coming from? Is it concentrated in one
    industry like retail or across many industries?
   No spillover effect from capital deepening to non-ICT
    TFP growth
Comparison of Heterogeneity within
Europe and within the United States
   Use gross state product per employee in the US vs
    GDP per employee in the EU – thanks, Susanto
   The three American Tigers are Arizona, Massachusetts,
    and Oregon
   Acceleration „80-‟95 vs „95-‟04 was exactly 1.91 in both
    the EU and US Tigers
   Comparing eight BEA regions to five large EU nations,
       US eight regions, 1.77 to 2.77
       Big EU countries, 0.0 to 2.10
   Initial obvious explanations: automatic fiscal stabilizers
    in the US, labor mobility
Productivity vs. Share Effects
in EU-US, 1995-2003
     Real estate        Manufacturing is nearly as important
                        as retail                                            Share                    Prod
         Comm.



           Serv.



        Finance



         Trans.



Retail/wholesale
                                                                                                       Non-durables prod
                                                                                     Non-durables share

 Manufacturing

                             ICT prod                                                         Non-ICT share
                                        Non-ICT prod
 Const./utilities                                      ICT share
                       But ICT is tiny
  Farms/mining
                       Only ~2% hours share

                -0.7       -0.6         -0.5      -0.4         -0.3   -0.2           -0.1        0           0.1      0.2
ALP growth multiplied by nominal shares
Real Estate

                                       U.S.
Communications


Services


Finance

                            E.U.
Transportation


Retail/Wholesale


Manufacturing


Construction Utilities                 US acceleration is widespread, not just in retail
                                       and manufacturing.
Farms/Mining
                                       EU weakness is also widespread
               -0.2      -0.1      0          0.1      0.2        0.3        0.4           0.5
     Tigers vs. Middle, It’s All
     Manufacturing
     Real estate


                              Prod                      Of the 1.95 percentage point gap, ~3/4
         Comm.
                                                        is due to manufacturing
           Serv.



        Finance                                share



          Trans.



Retail/wholesale



 Manufacturing



 Const./utilities



  Farms/mining


                -0.4   -0.2          0   0.2      0.4    0.6   0.8     1     1.2   1.4    1.6    1.8
Tortoises vs. Middle
     Real estate



         Comm.                                                   Prod



           Serv.
                                                                               Share

        Finance        Failure is more widespread.
                       Totally unrelated industries account for the decline
         Trans.
                       Note that this is largely driven by productivity,
                       not share effects
Retail/wholesale



 Manufacturing



 Const./utilities



  Farms/mining


                -0.7         -0.6     -0.5      -0.4      -0.3          -0.2           -0.1   0   0.1
             Interpreting the Tortoise
                Problem after 1995
   Failure is across the board
   Consistent with basic theme of paper, that there is a
    macro cause, a reduction in taxes and in regulations
   Understanding Share Effects
       ICT Share higher in US vs EU and also middle vs tortoises
       Big EU share deficit in retail/wholesale and services,
        consistent with high tax story
   Part of Tiger success is moving resources, out of
    agriculture for Greece and Ireland, into ICT mfg for
    Ireland and Finland
    ALP and Simple Labor Economics
   Y/H is only half the welfare story – H/N tells
    us the other half
   Decline in H/N in Europe vs US -- 88% to 74%
       In 1960, US was lowest; by 2004 it‟s highest
   Big turnaround after 1995
   Growth rate of H/N
     1979-95 -0.6%
     1995-2004 +0.5%

   Our current empirical investigation of H/N vs.
    taxes and regulations is still in its early stages
        The Tortoises are on a Hours
               Growth Tear,
         How Much Due to Taxes?
   Tortoise growth in H/N was 1.74 percent post 1995,
    vastly outstripping the US and EU Middle countries
   But Ireland also grew at 1.8%
       Reflects massive investment and associated TFP growth
                            Average Tax wedge
45


40
                Tortoises

35

                                                                      Tigers
30
                        EU-15

       Middle                                             US
25


20

                  Note that the Tortoises are always highest, followed by Middle countries,
15                followed by the Tigers and then the US

10                All countries markedly reduce taxes around 1997

5


0
     1960   1963    1966    1969   1972   1975   1978   1981   1984    1987    1990   1993   1996   1999   2002
        Reactions of Hours to Taxes
   Regressions of H/N on tax wedge
       Using H/N is a first approximation, need to study separate
        effects on E/N and H/E
   Double-log specification, estimated elasticity of H/N to
    tax wedge is -0.4
   Changes after 1995 don‟t match the tax changes very
    well, but they go in the right direction
   Middle countries are the exception
   While everybody else was increasing H/N, middle
    countries were working less – counter to tax story
Add in reaction of capital to hours
   In the short run, unit elasticity – i.e. capital moves
    slowly
   Long run, zero reaction – capital adjusts
   We can multiply the labor elasticity (.4) by the reaction
    of capital to hours (1) by capital‟s share (.33) to get the
    short run reaction of ALP to a 1% tax
    shock: .4*1*.33=.132.
   In other words, a 5% tax increase could be expected to
    lower short run ALP growth by ~.66%.
                    Conclusion
   EU productivity growth decline is across-the-board and
    not concentrated in retail. Durable manufacturing and
    ICT are culprits
   Similarly, failing in Tortoises compared to EU average
    is across the board, with a significant contribution of
    manufacturing
   Our bottom line is a mix of exogenous tax effects and
    exogenous decline in TFP growth
   Analogies with US 1972-95 slowdown, Europe ran out
    of ideas
           What to Remember from
                  this Paper
   Recent Reports by the OECD and others join together
    high unemployment and slow productivity growth as
    part of a general malaise.
   Our focus is different
   Labor market and tax reforms have raised hours per
    capita after three decades of decline.
   Rising hours per capita and declining growth of output
    per hour are signs of victory for European labor market
    reforms, not signs of defeat.

								
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