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The Slowdown in European The Slowdown in European Productivity Growth: A Productivity Growth: A
Tale of Tigers, Tortoises, Tale of Tigers, Tortoises, and Textbook Labor and Textbook Labor
EconomicsEconomicsIan Dew-Becker, NBER Ian Dew-Becker, NBER
and Robert J. Gordon, Northwestern and Robert J. Gordon, Northwestern University and NBERUniversity and NBER
NBER Summer InstituteNBER Summer Institute
Macroeconomics and Productivity WorkshopMacroeconomics and Productivity Workshop
July 20, 2006July 20, 2006
The US Accelerates,The US Accelerates,Europe DeceleratesEurope Decelerates
From 1950 to 1995 EU productivity growth From 1950 to 1995 EU productivity growth was faster than in the USwas faster 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 equal in A slowdown in EU productivity growth equal in
sizesize An explosion in research on the US takeoff and An explosion in research on the US takeoff and
but much less research on Europe’s slowdownbut much less research on Europe’s slowdown The magnitude of the shiftThe magnitude of the shift
EU/US level of labor productivity (ALP)EU/US level of labor productivity (ALP) 1979 1979 1995 1995 20042004
77%77% 94%94% 85%85%
Bringing Together the Bringing Together the Two Disparate LiteraturesTwo Disparate Literatures
Literature #1, why did Europe’s hours per Literature #1, why did Europe’s hours per capita decline (hereafter H/N)capita decline (hereafter H/N) High taxes, regulations, high minimum wagesHigh taxes, regulations, 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 misses the turnaroundLiterature #1 misses the turnaround
Since 1995 decline in tax rates and Since 1995 decline in tax rates and employment protection measuresemployment protection measures
Big increase in hours per capita, turnaround in Big increase in hours per capita, turnaround in both absolute terms and relative to the US both absolute terms and relative to the US Move back down LMove back down LDD curve curve
Literature #2 on EU-USLiterature #2 on EU-USProductivity Growth GapProductivity Growth Gap
Central Focus of Lit #2 on post-1995 Central Focus of Lit #2 on post-1995 turnaroundturnaround
Since 1995 EU H/N has grown faster Since 1995 EU H/N has grown faster than USthan US
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
Primary Attention in Lit #2: Primary Attention in Lit #2:
The US RevivalThe US Revival TFP accounts for most of the ALP gap, TFP accounts for most of the ALP gap,
capital-deepening relatively littlecapital-deepening relatively little ICT production TFP explains a relatively small ICT production TFP explains a relatively small
share of EU-US differenceshare of EU-US difference Most of the difference is TFP in ICT-using Most of the difference is TFP in ICT-using
industriesindustries Of these, the most important are:Of these, the most important are:
Wholesale tradeWholesale trade Retail tradeRetail trade Financial/securitiesFinancial/securities
Caveat – Groningen definition of ICT-Use is Caveat – Groningen definition of ICT-Use is obsolete, retail is not ICT-intensive (See obsolete, retail is not ICT-intensive (See Stiroh 2006)Stiroh 2006)
Textbook Labor Textbook Labor EconomicsEconomics
-2
-1
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8 9 10 11
Labor Input
Re
al W
ag
e
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
The Labor Demand CurveThe Labor Demand Curve
1970-95 EU climbs to the left1970-95 EU climbs to the left 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,” propelled by productivity catchup was “artificial,” propelled by policies making labor expensivepolicies making labor expensive
No busboys, grocery baggers, stores open less, no No busboys, grocery baggers, stores open less, no valets…valets…
1995-2004 EU slides right1995-2004 EU slides right Hours per capita start increasing while they Hours per capita start increasing while they
decline in the USdecline in the US Effects are magnified by slow reaction of capitalEffects are magnified by slow reaction of capital
This Paper: There is This Paper: There is Another Half to the PuzzleAnother Half to the Puzzle
The EU-US “turnaround” is the 1995-The EU-US “turnaround” is the 1995-2004 US acceleration minus the EU 2004 US acceleration minus the EU decelerationdeceleration
About 1/3 of the turnaround represents About 1/3 of the turnaround represents Europe’s deceleration, the rest the US Europe’s deceleration, the rest the US accelerationacceleration
Almost none of the literature on the EU Almost none of the literature on the EU productivity slowdown relates it to the productivity slowdown relates it to the slide down the labor demand curve.slide down the labor demand curve. Exception: recent paper by Saltari-Exception: recent paper by Saltari-
TravagliniTravaglini
ALP Growth, 1981-2004ALP Growth, 1981-2004
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1981 1986 1991 1996 2001
E.U. Output Per HourU.S. Output per Hour
Per
cent
Output vs. HoursOutput vs. Hours
-3
-2
-1
0
1
2
3
4
1981 1986 1991 1996 2001
US Output per Capita
EU-15 Output per Capita
EU-15 Hours per Capita
US Hours per Capita
We use a parameter of 1600 ratherthan 6400, so we’re picking up businesscycle level movements
EU-US population growth is fairly constant (~.7%)
Turnaround in TFP GrowthTurnaround in TFP Growthbut not Capitalbut not Capital
-1
0
1
2
3
4
5
6
1981 1986 1991 1996 2001
U.S Capital Input per Capita
E.U. Capital Input per Capita
E.U. Total Factor Productivity
U.S. Total Factor Productivity
Perc
ent
0
1
2
3
4
5
6
1981 1986 1991 1996 2001
U.S. Capitital DeepeningE.U. Capital Deepening
Per
cent
As in JHS, we know this is mainly dueto movements in hours, not capital
Since 2000, productivity is not driven by investmentRather, by TFP growth and hours decline
Defining Tigers and Defining Tigers and Tortoises, Tortoises,
Pop Shares and Private ALP Pop Shares and Private ALP GrowthGrowth
Tigers: Ireland, Finland, GreeceTigers: Ireland, Finland, Greece Pop Share: 5%Pop Share: 5% ALP 4.79%ALP 4.79%
Middle: Sweden, Austria, UK, Middle: Sweden, Austria, UK, Germany, Portugal, FranceGermany, Portugal, France Pop Share: 61%Pop Share: 61% ALP: 2.45%ALP: 2.45%
Tortoises: Belgium, Netherlands, Tortoises: Belgium, Netherlands, Denmark, Luxembourg, Spain, ItalyDenmark, Luxembourg, Spain, Italy Pop Share: 34%Pop Share: 34% ALP: 0.72% ALP: 0.72%
Within EU, big change from Within EU, big change from homogeneity to homogeneity to heterogeneityheterogeneity
Standard deviation of ALP growth rates across Standard deviation of ALP growth rates across 15 countries, 0.80 1979-95 to 1.23 1995-2004.15 countries, 0.80 1979-95 to 1.23 1995-2004.
Mainly accounted for by non-ICT TFPMainly accounted for by non-ICT TFP Tortoises actually have Tortoises actually have negativenegative non-ICT TFP growth non-ICT TFP growth
Spain and Italy are negative overallSpain and Italy are negative overall
Where is this coming from? Is it concentrated Where is this coming from? Is it concentrated in one industry like retail or across many in one industry like retail or across many industries?industries?
No spillover effect from capital deepening to No spillover effect from capital deepening to non-ICT TFP growthnon-ICT TFP growth
Comparison of Comparison of Heterogeneity within Heterogeneity within Europe and within the Europe and within the
United StatesUnited States Use gross state product per employee in the Use gross state product per employee in the US vs GDP per employee in the EU – thanks, US vs GDP per employee in the EU – thanks, SusantoSusanto
The three American Tigers are Arizona, The three American Tigers are Arizona, Massachusetts, and OregonMassachusetts, and Oregon
Acceleration ‘80-’95 vs ‘95-’04 was exactly Acceleration ‘80-’95 vs ‘95-’04 was exactly 1.91 in both the EU and US Tigers1.91 in both the EU and US Tigers
Comparing eight BEA regions to five large EU Comparing eight BEA regions to five large EU nations,nations, US eight regions, 1.77 to 2.77US eight regions, 1.77 to 2.77 Big EU countries, 0.0 to 2.10Big EU countries, 0.0 to 2.10
Initial obvious explanations: automatic fiscal Initial obvious explanations: automatic fiscal stabilizers in the US, labor mobilitystabilizers in the US, labor mobility
Productivity vs. Share EffectsProductivity vs. Share Effectsin EU-US, 1995-2003in EU-US, 1995-2003
-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
Tigers vs. Middle, It’s AllTigers vs. Middle, It’s AllManufacturingManufacturing
-0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8
Farms/mining
Const./utilities
Manufacturing
Retail/wholesale
Trans.
Finance
Serv.
Comm.
Real estate
Prod
share
Of the 1.95 percentage point gap, ~3/4is due to manufacturing
Tortoises vs. MiddleTortoises vs. Middle
-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1
Farms/mining
Const./utilities
Manufacturing
Retail/wholesale
Trans.
Finance
Serv.
Comm.
Real estate
Share
Prod
Failure is more widespread.Totally unrelated industries account for the declineNote that this is largely driven by productivity, not share effects
Interpreting the TortoiseInterpreting the TortoiseProblem after 1995Problem after 1995
Failure is across the boardFailure is across the board Consistent with basic theme of paper, that Consistent with basic theme of paper, that
there is a macro cause, a reduction in taxes there is a macro cause, a reduction in taxes and in regulationsand in regulations
Understanding Share EffectsUnderstanding Share Effects ICT Share higher in US vs EU and also middle vs ICT Share higher in US vs EU and also middle vs
tortoisestortoises Big EU share deficit in retail/wholesale and Big EU share deficit in retail/wholesale and
services, consistent with high tax storyservices, consistent with high tax story Part of Tiger success is moving resources, Part of Tiger success is moving resources,
out of agriculture for Greece and Ireland, out of agriculture for Greece and Ireland, into ICT mfg for Ireland and Finlandinto ICT mfg for Ireland and Finland
ALP and Simple Labor ALP and Simple Labor EconomicsEconomics
Y/H is only half the welfare story – H/N tells Y/H is only half the welfare story – H/N tells us the other halfus the other half
Decline in H/N in Europe vs US -- 88% to Decline in H/N in Europe vs US -- 88% to 74%74% In 1960, US was lowest; by 2004 it’s highestIn 1960, US was lowest; by 2004 it’s highest
Big turnaround after 1995Big turnaround after 1995 Growth rate of H/NGrowth rate of H/N
1979-95 -0.6%1979-95 -0.6% 1995-2004 +0.5%1995-2004 +0.5%
Our current empirical investigation of H/N Our current empirical investigation of H/N vs. taxes and regulations is still in its early vs. taxes and regulations is still in its early stagesstages
The Tortoises are on a The Tortoises are on a Hours Growth Tear,Hours Growth Tear,
How Much Due to Taxes?How Much Due to Taxes? Tortoise growth in H/N was 1.74 percent Tortoise growth in H/N was 1.74 percent
post 1995, vastly outstripping the US and post 1995, vastly outstripping the US and EU Middle countriesEU Middle countries
But Ireland also grew at 1.8%But Ireland also grew at 1.8% Reflects massive investment and associated Reflects massive investment and associated
TFP growthTFP growth
Average Tax wedgeAverage Tax wedge
0
5
10
15
20
25
30
35
40
45
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
USMiddle
Tigers
EU-15
Tortoises
Note that the Tortoises are always highest, followed by Middle countries,followed by the Tigers and then the US
All countries markedly reduce taxes around 1997
Reactions of Hours to Reactions of Hours to TaxesTaxes
Regressions of H/N on tax wedgeRegressions of H/N on tax wedge Using H/N is a first approximation, need to study Using H/N is a first approximation, need to study
separate effects on E/N and H/Eseparate effects on E/N and H/E Double-log specification, estimated elasticity Double-log specification, estimated elasticity
of H/N to tax wedge is -0.4of H/N to tax wedge is -0.4 Changes after 1995 don’t match the tax Changes after 1995 don’t match the tax
changes very well, but they go in the right changes very well, but they go in the right directiondirection
Middle countries are the exceptionMiddle countries are the exception While everybody else was increasing H/N, While everybody else was increasing H/N,
middle countries were working less – counter middle countries were working less – counter to tax storyto tax story
Add in reaction of capital Add in reaction of capital to hoursto hours
In the short run, unit elasticity – i.e. capital In the short run, unit elasticity – i.e. capital moves slowlymoves slowly
Long run, zero reaction – capital adjustsLong run, zero reaction – capital adjusts We can multiply the labor elasticity (.4) by the We can multiply the labor elasticity (.4) by the
reaction of capital to hours (1) by capital’s reaction of capital to hours (1) by capital’s share (.33) to get the short run reaction of share (.33) to get the short run reaction of ALP to a 1% tax shock: .4*1*.33=.132. ALP to a 1% tax shock: .4*1*.33=.132.
In other words, a 5% tax increase could be In other words, a 5% tax increase could be expected to lower short run ALP growth by expected to lower short run ALP growth by ~.66%.~.66%.
ConclusionConclusion EU productivity growth decline is across-EU productivity growth decline is across-
the-board and not concentrated in retail. the-board and not concentrated in retail. Durable manufacturing and ICT are culpritsDurable manufacturing and ICT are culprits
Similarly, failing in Tortoises compared to Similarly, failing in Tortoises compared to EU average is across the board, with a EU average is across the board, with a significant contribution of manufacturingsignificant contribution of manufacturing
Our bottom line is a mix of exogenous tax Our bottom line is a mix of exogenous tax effects and exogenous decline in TFP effects and exogenous decline in TFP growthgrowth
Analogies with US 1972-95 slowdown, Analogies with US 1972-95 slowdown, Europe ran out of ideasEurope ran out of ideas
What to Remember from What to Remember from this Paperthis Paper
Recent Reports by the OECD and others join Recent Reports by the OECD and others join together high unemployment and slow together high unemployment and slow productivity growth as part of a general productivity growth as part of a general malaise.malaise.
Our focus is differentOur focus is different Labor market and tax reforms have raised Labor market and tax reforms have raised
hours per capita after three decades of decline.hours per capita after three decades of decline. Rising hours per capita and declining growth of Rising hours per capita and declining growth of
output per hour are signs of victory for output per hour are signs of victory for European labor market reforms, not signs of European labor market reforms, not signs of defeat.defeat.