Eric Bartelsman*

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Sources of Productivity GrowthMicro dynamics and
macro outcomes

• Eric Bartelsman
• Sep. 17, 2008
• Warsaw, Poland
• Vrije Universiteit Amsterdam, Tinbergen
  Institute, and IZA.

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Long-run Productivity Growth
Commodity Time to earn 1885 (hours) Time to earn 2000 (hours) Productivity multiple
1-speed bicycle 260 7.2 36.1
Office Chair 24 2.0 12.0
Hair Brush 16 2.0 8.0
Silver Spoon 26 34.0 0.8
Source Brad DeLong, 1991-2000
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Economic Growth

• GDP Hours worked X GDP/hour
• Economic growth is weighted sum of
• Growth in labor input
• Growth in labor productivity
• Growth capital/labor ratio
• Growth in total factor productivity, or TFP
• Innovation as ultimate source of TFP
• Manna from heaven or intentional creation

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Inquiry into sources of productivity growth

• For whom is such academic research useful?
• Curiosity
• Economic policy
• Business sector

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Productivity Research

• Research methods traditionally have been
  macroeconomic
• Growth models
• Solow exogenous technology
• Romer RD (Human capital) as driver
• Growth empirics
• Cross-country evidence
• Multi-industry panel data
• Growth Accounting (EU-KLEMS)

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Value added per hour EU relative to US (source
EU Klems, market sector, EU15)
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Results from EUKLEMS
Nat.Acct. based Growth Accounting dataset

• Based on seminal work by Jorgenson
• Accounting framework for attributing productivity
  growth to factors of production
• Framework to aid in integration of National
  Accounts (see Jorgenson and Landefeld 2005).
• attempt to attribute all growth in output to
  factors under control of firms
• In recent years much growth is not accounted for
  (TFP growth)
• Differences in growth performance between US and
  EU visible, but not understandable
• Particularly, the differences in the impact of
  ICT remain a mystery

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Results from EUKLEMS
Source Timmer, OMahony, and van Ark (2007)
1995-2005 EU EU EU US US US
VA --Kict --TFP VA --Kict --TFP
Market 2.1 .4 1.0 3.7 .6 1.7
EleCom 3.8 .8 2.8 10.5 .8 8.7
MfgxElc 1.2 .2 1.7 1.8 .2 2.2
DISTR 2.6 .3 1.5 4.1 .5 2.1
FinBus 3.5 .9 -1.0 4.3 .7 .4
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Results from EUKLEMS
What we have not learned

• Why is contribution from IT capital lower in EU
• Or Why is ICT investment lower
• Why is growth in Elecom so much lower
• Or Why is Elecom sector small, especially in
  fast growing parts
• Why is unexplained growth so high? Why is TFP
  growth so much lower in EU
• Or Why is TFP growth especially low in ICT
  intensive sectors
• What, if anything, is the role of policy
• Or If policy affects firms and market
  interactions, what can industry data tell us
  about policy

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Average productivity vs aggregate productivity
Aggregate productivity depends not only on
firm-level productivity distribution
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Average productivity vs aggregate productivity
But also on firm-size distribution
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Businesses produce, not countries or industries

• Heterogeneity in productivity at the firm-level
  within sectors or countires
• A country may have a long tail problem
• Or, a lack of excellent firms

country1
long tail

• Sectoral productivity may not be a useful policy
  indicator

country2
Global frontier
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Why analysis of firm-level dynamics may help
answer questions

• Heterogeneous agents at micro level
• Diversity in firm-level strategies
• Market selection
• Sales and input growth, conditional on
  productivity and economic environment
• Combination of firm-level productivity impact and
  market share evolution gives total impact on
  industry productivity

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Sources of productivity growth

• Pushing out the frontier
• Increasing productivity below the frontier
• Diffusion of technology
• Reallocating resources from low to high
  productivity firms

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Example How to raise productivity below the
frontier

• Diffusion of existing technology
• Human capital
• Competitive pressure
• Framework conditions
• Reallocation of resources from less to more
  productive firms
• Frictions hamper efficient allocation
• Policy affects frictions in
• Product markets, labor market, entry/exit

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Reallocation and productivity

• Frictions impede reallocation to most productive
  firms
• Frictions affect selection of firms
• Who will enter, who will exit
• Olley-Pakes cross-term measures the effect

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Example ICT Adoption

• Carrot and Stick
• Profits to be gained if succesful (taking into
  account market share gains)
• Competitive pressure Market share/profit losses
  when others adopt successfully
• Costs and benefits
• Readiness skilled workers, high wages,
  complementary inputs
• Profits from being successful and scaling up
  business

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Broadband Adoption and Impact
v (log) real value added
Kit ICT capital service
Kn Non-IT capital service
Hrs hours
w Average wage
Capit ICT-capital as share of cap.
HiSkl High skilled worker share
DSL Broadband penetration
Churn Interquartile range of firm-level growth rate distribution
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Broadband Adoption and Impact
Variable DSL DSL Internet Internet
a1 ICT-indicator 1.24 .90 1.20 1.05
a2 Kn .35 .27 .34 .27
a3 Kit -.07 .05 -.08 .05
a4 Hrs .72 .68 .72 .68
b1 w(-1) .24 .02 .30 .01
b2 Capit .31 .20 .32 .17
b3 HiSkl .18 .38 .19 .33
b4 Churn .30 .15 .28 .14
dummies c,t i,t c,t i,t
D.F. 659 646 649 646
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Impact of Policy on ICT and Productivity

• Firms have capabilities and desire to try new
  ways of meeting market demand
• Since mid-1990s, this experimentation is often
  through ICT
• Firms desire to experiment depend on carrot and
  stick
• Leveraging of successful investment through scale
  increase is an enormous carrot
• Policy affects resource reallocation
• And thus indirectly firms choice for innovation
  strategy

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Impact of Labor Market Policy

• Based on results from Bartelsman, Perotti, and
  Scarpetta (2008), Employment Protection
  Legislation (EPL), reduces productivity in
  frontier industries
• Based on results from Bartelsman, Gautier, and de
  Wind (forthcoming), EPL reduces share of
  employment in frontier industries
• Frontier is a bit tautological
• it is a sector where payoff to successful
  experimentation is highest relative to follower
• It is a sector where the succesful firms are
  relatively furthest from followers
• It is sector with most experimentation

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Conclusions

• Productivity growth has its deep origins in the
  development of new ideas
• Firms make decisions on whether to innovate, to
  utilize existing technology, or just muddle
  along
• Firms decisions depend on policy environment and
  market interactions
• Policy may impact firms decisions directly, but
  also through selection mechanism