What do We Know about Services Productivity in Europe

1
University of Groningen

• What do We Know about Services Productivity in
  Europe?
•  
• Bart van Ark
• University of Groningen
• and The Conference Board
• CPB Workshop on "Productivity in services
• Determinants, international comparison,
  bottlenecks, policy"
• 10 June 2004, The Hague

2
Set Up of Presentation

• Evidence on services productivity as source of
  productivity slowdown in EU-15
• 56-industry level
• taxonomies (ICT using, skills, innovation type)
• The suspects explaining the European productivity
  slowdown
• measurement
• ICT and innovation in services
• the role of markets
• Roads forward to support services productivity
  growth
• innovation policies and improved framework
  conditions
• business strategies focused on intangible capital
  formation

3
GGDC Studies

• Bart van Ark, Robert Inklaar and Robert H.
  McGuckin (2003), "Changing Gear Productivity,
  ICT and Service Industries in Europe and the
  United States", in J.F. Christensen and P.
  Maskell, eds., The Industrial Dynamics of the New
  Digital Economy, Edward Elgar, pp. 56-99 (with
  TCB, updated)
• Mary OMahony and Bart van Ark, eds. (2003), EU
  Productivity and Competitiveness An Industry
  Perspective. Can Europe Resume the Catching-up
  Process?, DG Enterprise, European Union,
  Luxembourg (downloadable from http//www.ggdc.net/
  ) (with NIESR updated)
• Bart van Ark, Lourens Broersma and Pim den Hertog
  (2003), "Services Innovation, Performance and
  Policy A Review", Research Series No. 6,
  Directorate-General for Innovation, Ministry of
  Economic Affairs, The Hague (with Dialogic).
• Robert Inklaar, Mary O'Mahony and Marcel Timmer
  (2004), ICT and Europe's Productivity
  Performance Industry-level Growth Account
  Comparisons with the United States, Research
  Memorandum GD-68, Groningen Growth and
  Development Centre
• Robert McGuckin, Matthew Spiegelman and Bart van
  Ark (2004), Retail Productivity in Europe and
  U.S., The Conference Board (forthcoming)

4
Two GGDC data bases

• Industry Labour Productivity Database series on
  nominal and real value added, employment and
  hours, 56 industries for 15 EU countries and
  U.S., 1979-2002 (updated)
• applies U.S. hedonic deflators for ICT to
  ICT-producing industries
• industry aggregation on the basis of Tornqvist
  weighting
• Industry Growth Accounting Database above
  series for six asset types (of which three ICT),
  three skill levels, 26 industries for 4 EU
  countries (France, Germany, UK and Netherlands)
  and U.S., 1979-2001

5
Can the European Union Resume the Catching
Up-Process?
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-5
-4
-10
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Much variation across across industries
Labour Productivity Growth for 12 Main Sectors,
EU and U.S., 1979-2002
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Most important results on labour productivity at
level of 56 industries

• U.S. productivity growth advantage over Europe is
  not ubiquitous
• In just over 50 of industries, U.S. labour
  productivity growth is faster than in EU (market
  services and high tech manufacturing) from
  1995-2002
• Only a limited number of service industries
  account for U.S. advantage in productivity growth
• At the same time there is a lot more dynamism in
  U.S.
• Industries with above 2 productivity growth are
  much more present in U.S. than in EU
• In two-thirds of industries, U.S. labour
  productivity growth accelerates in 1995-2002 over
  1990-1995
• Whereas in almost three quarters of industries,
  EU labour productivity growth slows down

8
Contribution of largest contributors in U.S. is
substantial strongly dominated by services
Contribution to aggregate labour productivity of
5 largest and 5 least contributing industries in
U.S., U.S. and EU, 1995-2002
9
Contribution of largest contributors in Europe is
smaller and mainly in high tech manufacturing
Contribution to aggregate labour productivity of
5 largest and 5 least contributing industries in
EU., U.S. and EU, 1995-2002
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Much variation by industry across countries
Retail
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Much variation by industry across countries Banks
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Much variation by industry across countries
Telecommunication Services
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Variation across industries seems to be related
to aggregate productivity growth rate and
somewhat dependent on size of country Total
Economy
14
although less so when looking at Market
Services only
15
Suspect 1 Measurement problems hamper adequate
assessment of service productivity

• Few good studies on how big is the measurement
  problem concerning services productivity
• on U.S. Triplett, J.E. and B. Bosworth (2002)
  Baumol's disease has been cured IT and
  multifactor productivity in U.S. services
  industries, Brookings Institution, Washington
  D.C.
• International Anita Wölfl (2003), Productivity
  growth in service industries an assessment of
  recent patterns and the role of measurement,
  STI-Working Paper 2003-07, (Paris OECD)
• Some attempts to improve measurement of services
  output
• Brookings workshops on Measuring service sector
  output and methodological improvements by BEA
  and BLS, in particular in area of financial
  services
• Eurostat, Handbook on price and volume measures
  in national accounts, Luxembourg, 2001

16
Source Anita Woelfl (2003)
17
We cannot be sure of the bias in service output
measurement

• Over time
• Increased size of services has impact on
  aggregate (Griliches, 1992 1994)
• Increased complexity of services --gt
  multidimensionality and quality improvement
• But methodological changes in e.g. financial
  services do not show bias in only one direction
• Across countries
• Countries apply different methodologies (e.g.,
  retail)
• Part of service output measures is still based on
  input measures, in particular in non-market
  services, but there are differences in degree
  between countries
• Measurement of PPPs in services is complicated,
  depending on share of intermediate inputs in
  gross output

18
Measurement problems due to increased share of ICT
Primarily computers and other ICT goods. Solvable
by using hedonic price indices, which is possible
provided data availability
Primarily "customised" services and public
services (education, health, etc.). Should be
tackled by detailed analysis of multiple
dimensions of output by industry. Difficult both
in methodological terms as well in terms of data
Primarily semiconductors. Can be solved with
hedonic price indices, provided data availability
and investment flow matrices.
Primarily ICT capital input. Can be solved by
adjusting nominal input series with hedonic price
indices. Feasible provided availability of
investment flow matrices.
B. van Ark, Measuring the New Economy, Review of
Income and Wealth, March 2002
19
LP advantages in U.S. services are translated in
TFP advantages, as U.S. investment in ICT is only
slightly higher
Source Inklaar, OMahony and Timmer, 2003
20
Suspect 2 Service Industries do Not
Sufficiently Innovate

• ICT investment is an important enabler of
  innovation and productivity growth
• and U.S. has been more successful in obtaining
  productivity effects from ICT investment than EU
• But productive use of ICT investment is strongly
  dependent on various dimensions of
  non-technological innovations
• Productivity effects are strongest in services
  with supplier dominated innovations or strong
  organizational innovations

21
ICT taxonomy points to main differentials in
ICT-using services
Labour productivity by Industry Group on the
basis of ICT taxonomy, EU and U.S., 1995-2002
Outside ICT-producing, EU manufacturing has
productivity advantage but this advantage is
eroding
22
Complementarity of technological (ICT) and
non-technological innovations

• Case studies
• Company evidence (McKinsey)
• SIID studies on service innovation combined with
  firm micro firm level studies (van Ark et al.,
  2003)
• Combined evidence from macro and sector studies
  (TCB Retail study)
• Micro firm level studies
• Special organizational and work practice surveys
  on U.S (Brynjolffson and others, Black Lynch)
• Recent international work (OECD/Bartelsman,
  Hempell, van Leeuwen/vd. Wiel)
• Macro approaches
• Analysis of TFP residuals with use of RD,
  innovation measures (OECD)
• Cluster research with I/O and CIS tables
  (Broersma in van Ark et al., 2003)
• Intermediate input use of KIBS as proxy for
  organizational innovation (Broersma and van Ark,
  2004)

23
Innovators in services strongly combine
technological and non-technological innovations
Source CBS, Kennis en Economie
24
A four dimensional typology of service innovation
used in SIID studies
Source den Hertog and Bilderbeek (1999)
25
New measures of innovation according to4-D
innovation model look promising
Source De Jong et al, EIM, 2004
26
Characteristics of service innovation

• Multidimensionality is the rule
• Dimensions are often renewed in other sectors
  through new combinations
• The weights of dimensions change over time
• ICT facilitates in many cases, but is not
  sufficient nor always necessary
• Next to industry characteristics, firm strategies
  matter
• Service innovations take place along the whole
  value chain
• Co-operation (co-producing, co-innovating) takes
  place a lot
• De- and re-regulation is important but impact is
  diverse

27
The services sector is characterized by distinct
innovation clusters
28
Towards a service innovation taxonomy (developed
from Pavitt, 1984)
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(No Transcript)
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US advantages are strongest in supplier dominated
services, organizational innovative services and
client led services
Labour productivity by Industry Group on the
basis of combined Pavitt/ SIID taxonomy, EU and
U.S., 1995-2002
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Non-technological innovations mainly arise from
investment in intangible inputs
32
Intangibles inputs are key in facilitating the
innovation process and creating more productivity
33
Intensive IT users have relatively high
intermediate purchases from knowledge intensive
business services (KIBS), which can be used as
proxy for organizational capital
34
Productivity growth is enhanced by a combined
effect of ICT-use and KIBS purchases
35
Suspect 3 Rigid Markets Hamper Services
Productivity Improvements

• Competition helps to increase entry and exit but
  the effects on productivity greatly vary across
  industries
• Comprehensive reforms (in product and labour
  markets) seem to be crucial
• Many (de-)regulations are very industry-specific
• Considerable time lags seem to be present before
  productivity effects emerge
• Productivity may initially slow down after
  deregulations (e.g. retail)
• A certain amount of experimentation with optimal
  level of deregulation is necessary

36
Should policies focus on service innovation or
more broadly on framework conditions?
37
For business, productivity is either not an
explicit target or at best part of its overall
value creation model
38
Conclusions questions

• U.S. productivity advantages are not ubiquitous
  but is strongly based in market services
• Measurement issues are important but biases
  should not be automatically assumed
• There is a lot more dynamics in U.S. services
  (faster growth and investment, more innovation,
  more changes to markets) --gt is more turbulence
  what Europe needs?
• Some of U.S. productivity advantages in services
  cannot be easily adopted in Europe (e.g., scale
  effects)
• How can Europe develop productivity advantages in
  services?
• Diversity and customization?
• Advance combination of manufacturing and service
  functions?
• Set industry standards more easily?