Services productivity growth in Australia, Europe and US Robert Inklaar Groningen Growth and Development Centre, University of Groningen and The Conference Board with Bart van Ark and Marcel Timmer

Background: analysis  Different growth pattern since 1995  US, Australia faster GDP growth  Europe has slowed down  Mainly diverging productivity growth  But where is it coming from?  Need industry data  Productivity growth and levels  Investment in new technology (ICT)

Background: data  Results based on preliminary version of EUKLEMS database  Full industry productivity database; growth & levels; ; industries; Europe, US, and others  Big EU-funded project  15 institutions, GGDC leading  15 March 2007 first public release  See for details  Australia will be added later  Current results prepared for Economic Policy

Main findings  Productivity growth accelerated after 1995 in Anglo-Saxon countries  Market services main source of strength  Growth in Europe slowed down, in particular in services  ICT investment & complementary intangibles explain part  Competition and regulation further candidates

Surge in services productivity growth main post-1995 story

First suspect: ICT investment  Perform industry growth accounting exercise: Labour productivity growth ICT capital deepening Non-ICT capital deepening TFP growth Labour composition change

ICT is part of the story

But ICT may be more important  General purpose technology => complementary investments  For ICT mostly intangible, time-consuming  mismeasured in National Accounts?  Firm research & case studies find support  So far less from industry-level  Follow method of Brynjolfsson & Hitt (2003, REStat)

Main idea: increase time horizon

Long-term effect of ICT is twice as large as short-term effect

Robustness checks (1)  Works only for relatively measured industries  Excludes finance, business services  Other production function specifications (more general)  Show even higher returns (even short-term excess returns)  All show upward trend in coefficients  All show excess returns in the long-run

Robustness results (1)

Robustness checks (2)  Baseline removes country/year effects  Adding country/industry dummies removes effect => but this removes cross-industry, which is used in identification  Baseline is weighted least squares  Uses industry value added, but gross output or employment shows same results  OLS also very similar, but pattern of coefficients less smooth  Overall: fairly robust results

Robustness results (2)

Interpretation: intangible investment  Can’t just be random measurement error => would not cause ‘overshooting’  Could be ‘spillovers’, but mostly anecdotal evidence  Most likely the effect of intangible investments => misclassified as expenditures

However: this does not close the gap  Larger long-term effect of ICT is found in all countries*  Even effect in US is the same  ICT-related intangible investment then explains only part (0.4%)  So what about convergence to frontier? * This does not yet include Australia: need the KLEMS data for that

Convergence in only the minority of countries for total services

But convergence is an industry story

So what does this mean?  Convergence is happening, even in services  But not everywhere  Nicoletti & Scarpetta (’03): convergence depends on regulation  Confirmed here: more regulation => less convergence (correlation -0.6)

Competition is key (probably)  Regulation story is complex  Regulatory burden can be very industry-specific (retail case study)  Competition is about more than regulation  e.g. need robust competition authority  But still the most plausible explanation for productivity growth differences

Erwin’s Enquiries  Does not include land and inventories  Uses an internal rate of return  Assumes equal av. wage of self- employed as employees  Has a zero floor of user cost and capital share