The Slowdown in European Productivity Growth: A Tale of Tigers, Tortoises, and Textbook Labor Economics

1
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

2
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 Europes slowdown
• The magnitude of the shift
• EU/US level of labor productivity (ALP)
• 1979 1995 2004
• 77 94 85

3
Bringing Together the Two Disparate Literatures

• Literature 1, why did Europes hours per capita
  decline (hereafter H/N)
• High taxes, regulations, high minimum wages
• Europe made labor expensive
• Movement up Labor Demand curve gt 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

4
Literature 2 on EU-USProductivity 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

5
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• Caveat Groningen definition of ICT-Use is
  obsolete, retail is not ICT-intensive (See Stiroh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)

6
Textbook Labor Economics
7
The Labor Demand Curve

• 1970-95 EU climbs to the left
• Hours per capita decline, average labor
  productivity increases
• In this sense much of Europes 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

8
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 Europes
  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

9
ALP Growth, 1981-2004
10
Output vs. Hours
We use a parameter of 1600 rather than 6400, so
were picking up business cycle level movements
EU-US population growth is fairly constant (.7)
11
Turnaround in TFP Growthbut not Capital
12
As in JHS, we know this is mainly due to
movements in hours, not capital
Since 2000, productivity is not driven by
investment Rather, by TFP growth and hours decline
13
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

14
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

15
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

16
Productivity vs. Share Effectsin EU-US, 1995-2003
Manufacturing is nearly as important as retail
But ICT is tiny Only 2 hours share
17
ALP growth multiplied by nominal shares
US acceleration is widespread, not just in
retail and manufacturing. EU weakness is also
widespread
18
Tigers vs. Middle, Its AllManufacturing
Of the 1.95 percentage point gap, 3/4 is due to
manufacturing
19
Tortoises vs. Middle
Failure is more widespread. Totally unrelated
industries account for the decline Note that this
is largely driven by productivity, not share
effects
20
Interpreting the TortoiseProblem 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

21
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 its 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

22
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

23
Average Tax wedge
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
24
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 dont 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

25
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 capitals
  share (.33) to get the short run reaction of ALP
  to a 1 tax shock .41.33.132.
• In other words, a 5 tax increase could be
  expected to lower short run ALP growth by .66.

26
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

27
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.