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
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 Chatham House The Royal Institute of International Affairs 2
Labour productivity: a simple framework Y L = Af K L, Util 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). Chatham House The Royal Institute of International Affairs 3
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. Chatham House The Royal Institute of International Affairs 4
Labour productivity (1950-2016) 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 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). Chatham House The Royal Institute of International Affairs 5
. TFP growth rates (1950-2014) 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Germany France Italy Spain United Kingdom United States Japan -1.0% 1950-1969 1970-1989 1990-2014 Total Factor Average Growth Rates (1950-2014). Source: Total Economy Database (TED). Chatham House The Royal Institute of International Affairs 6
US: ITC-driven TFP resurgence? (1980-2010) 1.05 1 0.95 0.9 0.85 0.8 0.75 0.7 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. Chatham House The Royal Institute of International Affairs 7
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. Chatham House The Royal Institute of International Affairs 8
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. Chatham House The Royal Institute of International Affairs 9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Europe: from Maastricht to the crisis (1992-2007) 135 125 130 120 125 115 120 115 110 105 110 105 100 100 95 95 90 France Germany Italy Spain United Kingdom 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 10
Europe: recovering from the crisis (2007-today) 115 102 110 100 98 105 96 100 94 95 92 90 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 90 2007 2008 2009 2010 2011 2012 2013 2014 France Germany Italy Spain United Kingdom France Germany Italy Spain United Kingdom Labour productivity and TFP (2007-2016/2014). 2007=100. Sources: Total Economy Database (TED) and OECD. Chatham House The Royal Institute of International Affairs 11
Europe: post-crisis unemployment rates (2008-2016) 300 250 200 150 100 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 France Germany Italy Spain United Kingdom Unemployment rates (2008-2016). 2008=100. Source: OECD. Chatham House The Royal Institute of International Affairs 12
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). Chatham House The Royal Institute of International Affairs 13
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). Chatham House The Royal Institute of International Affairs 14
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Britain s productivity puzzle 110 105 100 95 90 85 80 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. 75 Labour Productivity GDP (Market Prices) Total Employment This paradox is known in the literature as the British productivity puzzle. Labour Productivity, GDP Market Prices and Total Employment, (1999-2016). 2008=100. Sources: ONS, Datastream and our calculations. Chatham House The Royal Institute of International Affairs 15
Labour productivity in the UK (2000-2016) 115 110 105 100 95 90 85 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Labour Productivity, United Kingdom (2000-2016). 2008=100. Linear Trend (2000-2004). Source: ONS and our calculation. Chatham House The Royal Institute of International Affairs 16
UK: depressed real earnings (2000-2016) 120 115 110 105 100 95 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. 90 85 80 Such labour hoarding is capable to explain low labour productivity levels in a context of high GDP growth. Real Average Weekly Earnings, United Kingdom. (2000-2016). 2008=100 with 2000-2004 trend. Sources: ONS and our calculation. Chatham House The Royal Institute of International Affairs 17
Labour productivity in Italy: lost decades 104 102 100 98 96 94 92 90 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Labour Productivity Trendline (1996-2004) Trendline (1996-2007) Trendline (2001-2007) Trendline (1996-2016) Labour Productivity, Italy (1996-2016), 2008=100 and linear trend. Sources: OECD and our calculations. Chatham House The Royal Institute of International Affairs 18
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Factor Productivity (1990-2014) 105 TFP growth in Italy has been particularly worrisome. 100 95 90 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. 85 Investment in education and research might restore long term growth possibilities. Total Factor Productivity, Italy (1990-2014), 2001=100. Source: OECD. Chatham House The Royal Institute of International Affairs 19
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). Chatham House The Royal Institute of International Affairs 20
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. Chatham House The Royal Institute of International Affairs 21
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) Chatham House The Royal Institute of International Affairs