The New Normal - Dipartimento Tesoro · The New Normal: A Sector-Level Perspective on Productivity...

The New Normal:

A Sector-Level Perspective on Productivity Trends

in Advanced Economies

Vikram Haksar

International Monetary Fund

Roadmap

International Monetary Fund 2

Growth and Productivity Trends in AEs

• Aggregate

• Sector-level

How to Boost TFP Growth?

• Input reallocation across sectors

• Structural improvements within industries

• Dynamic effects of reform on TFP and output growth

3

Aggregate Trends


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0.0

1.0

2.0

3.0

4.0

5.0

1970 1975 1980 1985 1990 1995 2000 2005 2010

Labor Productivity Trend GrowthPre-Crisis

US UK

Core Europe Other Europe

2007

Growth and Productivity are in Decline


0

0.2

0.4

0.6

0.8

1

0.0

1.0

2.0

3.0

4.0

5.0

1970 1975 1980 1985 1990 1995 2000 2005 2010

Trend GrowthAll Advanced Economies

GDP (precrisis)

GDP (whole sample)

Labor Productivity (precrisis)

Labor Productivity (whole sample)

2007

percent percent

Labor Supply Played a Secondary Role


Labor productivity Labor utilization Dependency ratio Population growth

E - Core Europe; P - Periphery; J - Japan; N - Natural Resource Producers

Average Labor Supply Growth Contributions (in percent; purchasing power parity weighted)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1970-79 1980-89 1990-99 2000-07 2008-11

All Countries

US

US

US

UK

UK

UK

E

EE

O

O

O

-0.8

-0.4

0

0.4

0.8

-0.8 -0.4 0 0.4 0.8

1990-2

007

1970-89

Selected Country Groups

E - Core Europe; O - Other Europe

Capital Deepening Struggled…


-0.5

0.5

1.5

2.5

3.5

1990 1995 2000 2005

US

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1990 1995 2000 2005 2010

Labor Productivity DecompositionUS (PPP weighted)

ICT Capital Deepening Non-ICT Capital Deepening Human Capital

Contribution of Capital Deepening to Labor Productivity (in percent)

-0.5

0.5

1.5

2.5

3.5

1990 1995 2000 2005

Core Europe (PPP weighted)

… while TFP across AEs Stagnated or Declined


Trend Total Factor Productivity Growth (in percent)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

0.60

1991 1994 1997 2000 2003 2006 2009

Precrisis Sample Full Sample

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

-0.1

0.1

0.3

0.5

0.7

0.9

1991 1994 1997 2000 2003 2006 2009

Advanced Economies (PPP Weighted)

2007

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

1991 1994 1997 2000 2003 2006 2009

Selected Country Groups, pre-crisis

Other Europe US

Core Europe UK

2007

Tech. Innovation and Catch-up in AEs Slowed


Average TFP Level

(percent of frontier)

TFP Frontier Growth Rate

(percent)

79.2679.73

80.2180.82

81.3181.80

82.1782.4282.5482.6382.30

81.9681.5881.38

75

77

79

81

83

85

1983-9

3

1984-9

4

1985-9

5

1986-9

6

1987-9

7

1988-9

8

1989-9

9

1990-0

0

1991-0

1

1992-0

2

1993-0

3

1994-0

4

1995-0

5

1996-0

6

1997-0

7

Avg. TFP (percent of frontier)

9

Sectoral Trends


EU KLEMS: Unique Industry-Level Database


Product of a research project financed by the EC

Provides internationally comparable, industry-level series on output, inputs, and productivity

Coverage

1970 – 2007/12 (later start years for some countries)

25 EU countries + U.S. and Japan

31 industries (for growth accounting purposes)

Key strength

More granular and accurately measured labor (skill levels) / capital inputs (ICT vs. non-ICT) at the industry level.

Construction of industry TFP level estimates

GGDC Productivity Database + EU KLEMS

11

Structural Shift in AEs into Services


Agriculture

ICTGS

Personal

Finance

Manufacturing

Distribution

NonMarket

0 5 10 15 20 25 30 35

Percentage of total hours worked

Agriculture

ICTGS

Personal

Finance

Manufacturing

Distribution

NonMarket

0 5 10 15 20 25 30 35

Percentage of real value added (2005 LCU)

Change in Employment and Value Added, 1980-2007 (in percent, purchasing power parity weighted)

Decrease

Increase

-1 0 1 2 3 4

Finland

Sweden

Germany

UK

France

Spain

Italy

US

Manufacturing (non-ICT)

-4 -3 -2 -1 0 1 2 3

Finland

Sweden

France

Germany

UK

US

Italy

Spain

Personal Services

-1.5 -1 -0.5 0 0.5 1 1.5

Germany

France

Italy

UK

Spain

Sweden

Finland

Nonmarket Services

-2 -1 0 1 2 3

Germany

Finland

Sweden

US

UK

France

Italy

Spain

Distribution

TFP Growth Within Sectors for G7 countries


Change in TFP Growth rates, 1990-99 to 2000-07

Decrease

Increase

Large Gaps in TFP Levels Across Industries


Total Factor Productivity Levels (percent of frontier, 2000-07 average)

14

How To Boost TFP Growth?

Improve input allocation across sectors

Remove structural rigidities

Invest in knowledge capital and innovation


Resource Misallocation Across Sectors


Wedge =

1

User Cost of Input

-1

0

1

2

3

4

Sectoral Capital Wedges

-1

0

1

2

3

4

Sectoral Labor Wedges

-1

-0.5

0

0.5

1

1.5

2

Sectoral Capital Wedges

2000-07 sample average ITA PRT

TFP Growth Gains from Better Input Allocation


Percentage

points

* Labor skill composition data not available

Structural Drivers of TFP Growth


Product Market

Regulation

Labor Skill

ICT Capital

R&D

Knowledge Capital Structural Rigidities

Model Setup


“Distance-to-Frontier” Approach

ijttji

ijtktk

lktk

k

ijtLjtijt

DDD

GAPXX

GAPTFPTFP

321

111

1210

ijtTFP : TFP growth rate in country i, industry j, in year t

LjtTFP : TFP growth rate in the global frontier country (L) in industry j

1ijtGAP : TFP level gap from the frontier in year t-1, percent.

1ktX : Structural variables of interest.

tji DDD ,, : Country, industry, time dummies.

Intensity of Product Market Regulations


1 High index value indicates more anti-competitive regulations.

USA

USAUSA

USA

USA

USA

JPN

ITA

ITAITA

ITA

ITA

ITA

GBR

GBRGBR

GBR

GBR

GBR

ESP

ESP ESP

ESP

ESP

ESP

DEU

DEUDEU

DEU

DEU

DEU

AUS

AUSAUT

AUTAUT

NLD

0.0

0.1

0.2

0.3

0.4

ICT MANUFACTURING OTHER

PRODUCTION

DISTRIBUTION FINANCE AND

BUSINESS

SERVICES

PERSONAL

SERVICES

Upstream Product Market Regulations by Sector 1

(Index)

Intensity of ICT Capital Use


USA

USA

USA

USA

USAJPN

ITA

ITA

ITAITA

ITA

GBR

GBRGBR

GBR

GBR

ESP

ESP

ESP

ESP

DEUDEU

DEU

DEU

DNK

DNK

SWE

0

10

20

30

40

50

60

70

80

90

ICT MANUFACTURING OTHER

PRODUCTION

DISTRIBUTION FINANCE AND

BUSINESS

SERVICES

PERSONAL

SERVICES

Share of ICT Capital by Sector

(Percent, compensation to capital service)

Impact of Product and Labor Market Frictions on TFP Growth

Dependent Variable: TFP

Growth RateAll Industries All industries All Industries Manufacturing ICT-related 1/ Services

(Percent, Annual) 1 2 3 4 5 6

Constant *** *** *** * ‧ ***

TFP Growth Rate at the Frontier *** *** *** *** * ‧

TFP Gap w.r.t. the Frontier *** *** *** ** * **

Product Market Regulation ‧ ‧ * ‧ ‧ ***

Labor Market Regulation ‧ ‧ ‧ ‧ ‧ ‧

Product Market Regulation X TFP Gap ‧ ‧ ***

Labor Market Regulation X TFP Gap ‧ ‧ ‧ ‧

Product Market Regulation X MFG ‧ **

Product Market Regulation X SVC *** ***

Product Market Regulation X TFP Gap X MFG ‧

Product Market Regulation X TFP Gap X SVC ***

Number of observations 4,646 4,646 4,646 2,424 1,616 1,414R2 0.2 0.2 0.2 0.2 0.3 0.2

Impact of ICT, Human Capital, and R&D

Dependent Variable: TFP

Growth RateAll Industries All Industries Manufacturing ICT-related 1/ Services

(Percent, Annual) 1 2 3 4 5

Constant ‧ ** ‧ *** **

TFP Growth Rate at the Frontier *** *** *** * ‧

TFP Gap w.r.t. the Frontier ‧ *** *** *** ***

ICT Capital ** ‧ *** ‧ *

High-skilled Labor * *** ‧ *** ***

R&D Expenditure * *** *** *** ‧

ICT Capital X TFP Gap ‧ ** **

High-skilled Labor X TFP Gap *** ‧ *** ***

R&D Expenditure X TFP Gap ‧ ‧ *** ‧

Number of observations 2,685 2,685 1,707 849 487R2 0.1 0.1 0.2 0.2 0.2

Empirical Findings


Product market regulation in services is costly for overall TFP growth.

The negative impact is greater for a country-industry pair closer to the global frontier.

More intensive use of high skilled labor, ICT capital, and R&D also boost TFP growth.

In the case of high labor skill, the overall gain is higher for a country-industry pair closer to the global frontier

Similar results hold for ICT capital use and R&D spending in the manufacturing and ICT sector, respectively.

TFP Growth Gains from Structural Improvement


Annual TFP growth gain range for major advanced economies (in percentage points)

DEU

DEU

DEU

ESP

ESPESP

GBR

GBR

GBRGBR

ITA

ITAITA

FRA

0.0

0.2

0.4

0.6

0.8

1.0

1.2

PMR Dereg. Labor Skill ICT Capital R&D

25

Dynamic Effects of Reform


Identification of Reform Shocks


“Reform” shock

Sijt = 1 if ΔX > 2 standard deviation of ΔX

= 0 otherwise,

ΔX: Annual change of a structural indicator X.

Additional structural indicators:

• Employment Protection Legislation

• Labor Tax Wedge

• Infrastructure

Reform “Shock” Episodes


0

2

4

6

8

10

1970-79 1980-89 1990-99 2000-07

Ad

just

ed

num

ber

per

countr

y

Infrastructure, Product and Labor

Markets Reforms

Product Market Reforms Job Protection Legislation

Infrastructure Labor Tax Wedge

0

0.5

1

1.5

2

1970-79 1980-89 1990-99 2000-07

Ad

just

ed

num

ber

per

countr

y

R&D, ICT Capital, and High-

Skilled Labor(number per country)

R&D ICT capital High-Skilled Labor

Model Setup


• yijt -- TFP (real value added, employment) level

• Sijt -- Reform shocks

• Xijt -- A set of controls

• Di, Dj, Dt -- Country, industry and time dummies

• k=1, 2, …, 5

Impact of a reform shock =

∆yi,j,t+k = β0 + β1Si,j,t + β2yi,j,t−τ

τ=3

τ=1

+β3′ Xit + α1Di + α2Dj + α3Dt + εi,j,t

𝜷𝟏

Dynamic Effects of Reform on TFP


ST MT ST MT ST MT ST MT ST MT ST MT ST MT

>0.10

High-skilled Labor

R&D

ICT Capital

Infrastructure

<-0.10 <-0.05 <0.00 >0.00 >0.05

Personal

ServicesTotal

Product Market Regulation

Job Protection Legislation

Labor Tax Wedge

Mfg.Other

Production

Finance /

BusinessICT Distribution

Impact of Reform on Initial Conditions


0

5

10

15

20

25

30

Product Market

Regulation

Labor Tax Wedge R&D ICT Capital Infrastructure

Baseline

50th percentile

75th percentile

Medium-Term Impact of Reforms on Total Productivity

Growth: Conditional on Initial Settings (Percent)

Impact of Reform Across Business Cycles


Impact of Reform Shocks on Total Productivity across

the Business Cycles (Percent)

0

5

10

15

20

25

Product

Market

Regulation

Labor Tax

Wedge

R&D ICT Capital Infrastructure

Positive output gap Negative output gap

Dynamic Effects of Reform on Employment



Mfg.Other

Production

Finance /


Infrastructure

Personal

ServicesTotal



<-0.04 <-0.02 <0.00 >0.00 >0.02 >0.04

High-skilled Labor

R&D

ICT Capital

Dynamic Effects of Reform on Output



Mfg.Other

Production

Finance /


Infrastructure

Personal

ServicesTotal



<-0.04 <-0.02 <0.00 >0.00 >0.02 >0.04

High-skilled Labor

R&D

ICT Capital

Takeaways and Looking Ahead


Long run decline in AM output and productivity growth.

How to turn around? Diagnose misallocations and design sector and country-specific reforms.

Misallocations across sector vary by country, but reducing the wedges driving them can yield large TFP gains

Lifting services sector productivity is a priority given poor performance and large size of the sector. Lower barriers to entry key--larger gains where initial efficiency is worse (JPN, ITA, ESP)

Advance of the technology frontier too has slowed—results suggest back to basic’s investments in R&D/ICT/Human capital.

Key to think about how countries facing weak demand can prioritize least-disruptive-to-near-term-cycle reforms. Some evidence that lowering entry barriers relatively benign in AM’s.

35

ANNEX


Wedges


In an optimal allocation:

In reality, frictions create “wedges” that lead to

inefficient allocation:

ji

ji

MRLMRL

MRKMRK

j

j

i

iMPKMPK

11 i

j

i

j

MPK

MPK

1

1

: Marginal Return to Capital

: Marginal Return to Labor

The New Normal - Dipartimento Tesoro · The New Normal: A Sector-Level Perspective on Productivity...

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