Assessing the Impact of Product Market Reforms in Spain · Assessing the Impact of Product Market...
Transcript of Assessing the Impact of Product Market Reforms in Spain · Assessing the Impact of Product Market...
Assessing the Impact of Product Market Reforms in Spain Comments to the presentation by Pablo Hernández de Cos, Bank of Spain
Rafael Doménech Assessing Product Market Reforms in Programme and Vulnerable Countries Brussels, November 25, 2013
Assessing the Impact of Product Market Reforms in Spain November 2013
Main results of Hernández de Cos’ analysis
• The impact of the internal devaluation process on growth and employment depends both on wage moderation and the adjustment in price-cost margins
• Available indicators point to some progress in terms of PMR in Spain, but there is room for improvement (page 12)
• Since 2008 the profit share in NFCs (GOS/GVA) has increased over 5 pp, as in other vulnerable countries. However, this proxy has some pitfalls (capital cost, heterogeneous firms, etc.)
• Markups around 1.2 until 2007 then increased towards 1.3 in 2011. Higher initial markups and debt ratios in 2007 explain the change of markups in 57 sectors
• Regional regulation has been reduced with the 2010 Retail Trade Law, but regulation remains very heterogeneous across regions
• Productivity “duality”: lower productivity than our peer countries for small firms, and comparable productivity for large firms
Page 2
Assessing the Impact of Product Market Reforms in Spain November 2013
Main results of Hernández de Cos’ analysis
• Main economic policy implications
• Signs of improvements in several dimensions: retail sector, housing, administrative burden
• Need to monitor closely other reforms such as energy sector, judicial system, professional services, etc.
• Need to tackle lack of efficiency in business dynamics and to increase firm size
• This presentation
• analyses a crucial factor for employment growth and structural reforms
• finds very interesting empirical results, and
• offers sound economic policy recommendations
Page 3
Assessing the Impact of Product Market Reforms in Spain November 2013
Structure of this presentation
• Three main comments
• Markups and prices
• Regional implications of product market regulations
• The effects of PMR on firm size and implications for aggregate productivity
• Other comments
• Concluding remarks
Page 4
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 5
Aggregate labour demand in the private sector, Spain 2007-2013 Source: BBVA Research and Andrés and Doménech (2013)
Employment growth is the most important challenge of the Spanish economy in the short and medium run
… other factors as productivity, capital accumulation and markups are important as well …
Although wage rigidities seem to be the most important factor behind employment destruction (movement along the aggregate labour demand) …
… particularly for successful results of labour market reforms
1. Markups and prices
Markups and aggregate labour demand
1T2007
Aggregate labour demand
1T2008
2T2012
4T2012
2T2013
94%
96%
98%
100%
102%
104%
106%
108%
110%
112%
75% 80% 85% 90% 95% 100% 105%
Rea
l com
pens
atio
n of
wag
e ea
rner
(1T2
008=
100)
Full-time equivalent employment (1T2008=100)
Markup reduction
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 6
In any case, the behaviour of markups does not prevent prices (GDP deflator) to respond to changes
in unit labour costs ...
... both in expansions and recessions
Spanish evidence fits nicely to other advanced economies: inflation falls when nominal ULC growth
diminishes
Prices and nominal ULC, 2000-8 and 2009-13 Averages of annual growth of GDP deflator and nominal ULC* Source: AMECO and BBVA Research
-2
-1
0
1
2
3
4
5
6
7
8
-2 0 2 4 6 8
Gro
wth
of G
DP
defla
tor (
%)
Growth of nominal ULC(%)
España 2000-8
España 2009-13
2009-13
2000-8
* Each point in this graph represents EU27 countries and major advanced economies Included in the AMECO database for 2000-8 (blue) and 2009-13 (red). In Spain unit labour costs from 2009 to 2013 are calculated using compensation per wage earner
1. Markups and prices
Prices and nominal unit labour costs
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 7
Initial markups and the selection of efficient firms: Have been the most efficient firms with higher
markups the ones that have survived?
Composition effects may be relevant
Financial restrictions and financial fragmentation in Europe
Rolling regression: estimates of price-cost margin 4-year rolling windows, 10% confidence intervals and GMM estimation Source: Hernández de Cos, Bank of Spain (2013)
1. Markups and prices
The behaviour of markups during the crisis
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 8
Assume a tradable good and a common technology, and that the one-price law holds for final goods and
intermediate inputs
Under the assumption of free movements of capital …
… financial fragmentation implies that wages should be lower in countries with higher financial costs
Price decomposition Source: BBVA Research
1. Markups and prices
Implications of financial fragmentation in Europe
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Core countries Spain
wages
Intermediate inputs
Debt
Equity
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 9
Retail trade regulation is one of the factors that helps to explain regional performance
With only two factors (human capital and retail trade regulations) we can explain 95% on regional variance
in GDP per working-age population
Economic relevance: GDP per wap could be increased 9% on average if other regions improved their retail
trade regulations to the level observed in Madrid
The effects of retail trade regulations on GDP per wap Source: BBVA Research and Think Tank Civismo
2. Regional implications of product market regulations
Retail trade regulations and GDP
AND
ARA
AST
BAL
CAN
CANT CYL
CLM
CAT
VAL
EXT
GAL
MAD
MUR
NAV PV
RIO
15,000
17,000
19,000
21,000
23,000
25,000
27,000
29,000
15,0
00
17,0
00
19,0
00
21,0
00
23,0
00
25,0
00
27,0
00
29,0
00
GD
P pe
r wor
king
-age
pop
ulat
ion,
201
1
GDP per working-age population explained by fundamentals
Observed
With best retail trade regulations
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 10
Given a common labour market regulation, differences in productivity explain a large share of
differences in unemployment rates (62%)
Through its effects on productivity, retail trade regulations also affect the unemployment rates
Unemployment rates could be reduced by 4pp on average if other regions improved their retail trade
regulations to the level observed in Madrid
The effects of retail trade regulations on unemployment Source: BBVA Research and Think Tank Civismo
2. Regional implications of product market regulations
Retail trade regulations and unemployment
AND
ARA
AST BAL
CAN
CANT
CYL
CLM
CAT
VAL
EXT
GAL
MAD
MUR
NAV
PV
RIO
10
15
20
25
30
35
15,0
00
17,0
00
19,0
00
21,0
00
23,0
00
25,0
00
27,0
00
29,0
00
Une
mpl
oym
ent r
ate,
201
2
GDP per working-age population, 2011
Observed
With best retail trade regulations
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 11
Firm size is significantly correlated with aggregate labour productivity
Composition effect matters: lower productivity than our peer countries for small firms, and comparable
productivity for large firms
with the firm size distribution of Germany (from micro to large firms), Spain could improve aggregate
productivity by 13% (Círculo de Empresarios, 2013)
Firm size and aggregate productivity Source: BBVA Research and OECD
3. PMR, firm size and productivity
Firm size and aggregate productivity
AUS
AUT
BEL
DEU
DNK
ESP
FIN
FRA
GBR
GRE
IRE
ITA JAP
NLD
NZL
POR
SWE
USA
45
55
65
75
85
95
105
5 10 15 20 25 30 35 40
Prod
ucLvity
per hou
r, 2008, U
SA=100
Share of employment in firms with less than 200 workers, 2006
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 12
Firm size is correlated with product market regulation
Excessive tendency towards size-dependent policies favouring small-sized firms
Policies favouring the creation of small firms should be complemented with policies favouring the
increase of firm size (correct incentives)
Product market regulation and firm size Source: Cuerpo, Doménech and González-Calbet (2011)
3. PMR, firm size and productivity
Product market regulation and firm size
AUS AUT
BEL DEU DNK
ESP
FIN
FRA GBR
GRE
IRE
ITA
JAP
NLD NOR
NZL
POR
SWE
USA
8
12
16
20
24
28
32
36
0.8 1.0 1.2 1.4 1.6 1.8
Share of employmen
t in firms w
ith less th
an 200
workers, 2006
Index of product market regulaLons, OECD, 2003
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 13
• As stated by Hernández de Cos, it is important to identify and correct anti-competitive service sector regulation on manufacturing
• The literature has shown that value added, productivity, and export growth in downstream manufacturing sectors suffer from inadequate service sector regulation
• The service sector regulation that matters most relates to energy, professional services, transport, distribution networks and telecommunications
• This has had important effects within OECD countries and evidence is still gathering (see Barone and Cingano, Economic Journal, 2011)
4. Other comments
Service sector regulation
Assessing the Impact of Product Market Reforms in Spain November 2013
Page 14
• Assessment of the impact of the new institution created to monitor competition: Comisión Nacional de los Mercados y la Competencia
• Hernández de Cos concludes that “there has been significant improvement in red tape: firms administrative burden and costs of starting a business” … … but we lack good information on this and firms still complain about this burden, which can be reduced significantly
• Judicial system efficiency and legal certainty are also extremely important
• The Reform of Public Administration (CORA)
• Very large effects on the performance of the private sector
• Proposed by the central government but its final effects will depend on the willingness of other administrations (regional governments) to coordinate and implement the correct measures
4. Other comments
Other reforms
Assessing the Impact of Product Market Reforms in Spain November 2013
Concluding remarks
Page 15
• Product market reforms are important complementary measures to wage moderation and productivity growth to improve competitiveness and to increase employment creation
• Financial restrictions and financial fragmentation in Europe are relevant factors behind the recent behaviour of markups
• Retail trade regulation is one of the factors that helps to explain regional differences in labour productivity and unemployment rates
• Product market regulations also affect firm dynamics and size
• In order to increase potential growth, Spain also needs to improve service sector regulations imposing best European practices
Assessing the Impact of Product Market Reforms in Spain Comments to the presentation by Pablo Hernández de Cos, Bank of Spain
Rafael Doménech Assessing Product Market Reforms in Programme and Vulnerable Countries Brussels, November 25, 2013