MOVING EUROPE’S PRODUCTIVITY FRONTIER: The Role of Human Capital Karl PICHELMANN “Quality of Tertiary Education and the Economic Policy Agenda” Ljubljana, Slovenia, April 2, 2008

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Moving Europe‘s productivity frontier Moving Europe‘s productivity frontier THE BACKGROUND Slowdown in productivity growth since mid-90s Slowdown in productivity growth since mid-90s Pick-up since 2005 indicating a trend reversal? Pick-up since 2005 indicating a trend reversal? THE ANALYSIS IN THE REPORT Reflection of employment-productivity trade-off? Reflection of employment-productivity trade-off? Impact of productivity-enhancing policies? Impact of productivity-enhancing policies? THE ROLE OF HUMAN CAPITAL FORMATION Private and social returns to education and training Private and social returns to education and training The importance of „frontier effects“ The importance of „frontier effects“  Implementation of the renewed Lisbon strategy

Growth accounting EU vs. US Growth accounting EU vs. US

Gross value added growth and contributions (annual average volume growth rates in %) EU15ex5US Total Industries Labour Services Hours Composition Capital Services ICT Non-ICT TFP Total Industries

Trend growth in output per employee

Employment & Productivity An eventual trade-off? Employment & Productivity An eventual trade-off?

THE IMPACT OF LABOUR MARKET REFORMS Macro-simulation analysis – aggregate level Macro-simulation analysis – aggregate level  Significant reduction of the NAIRU  Elasticity of productivity ~ -1/3 Difference-analysis: lower attachment groups Difference-analysis: lower attachment groups  Robust positive impact on employment rates  Negative effect on productivity growth  Favourable employment effect at little cost

Trend growth in total factor productivity

The pursuit of higher productivity The pursuit of higher productivity ANOTHER LOOK AT POLICIES Investing in knowledge and innovation Investing in knowledge and innovation

The determinants of TFP growth The determinants of TFP growth AN ANALYSIS OF „FRONTIER“ EFFECTS A „Schumpeterian“ approach A „Schumpeterian“ approach

The determinants of TFP growth The determinants of TFP growth AN ANALYSIS OF „FRONTIER“ EFFECTS Regression analysis using EU KLEMS database Regression analysis using EU KLEMS database  TFP growth at the frontier  Technological gap  R & D  Human capital  Regulation indicators  „Frontier“ effects increasingly important  Interaction with R&D and human capital  Industry-specific regulatory reform approach

The pursuit of higher productivity The pursuit of higher productivity ANOTHER LOOK AT POLICIES Investing in knowledge and innovation Investing in knowledge and innovation Efficiency of public spending Efficiency of public spending Link between competition and innovation Link between competition and innovation Barriers to the reallocation of resources Barriers to the reallocation of resources  „Flexicurity“ in labour markets  Entry and exit regulations, SME‘s policies  Reduction of administrative burdens  A fully functioning single market  Analysis reconfirms Lisbon strategy priorities

The Macroeconomics of Higher Education The Macroeconomics of Higher Education

The private internal rates of return to tertiary education The private internal rates of return to tertiary education These rates of return include wage, employability, unemployment benefit and pension premia associated with tertiary education and are adjusted for taxation. They also include the opportunity and direct costs of education. They are calculated assuming that labour productivity grows at 1.75% per year in all countries. Source: OECD

The private internal rates of return to tertiary education The private internal rates of return to tertiary education These rates of return include wage, employability, unemployment benefit and pension premia associated with tertiary education and are adjusted for taxation. They also include the opportunity and direct costs of education. They are calculated assuming that labour productivity grows at 1.75% per year in all countries. Source: OECD

Signalling or „true“ productivity effects Signalling or „true“ productivity effects

The Macroeconomics of „Schooling“ The Macroeconomics of „Schooling“ THE SOCIAL RETURNS TO EDUCATION Impact of human capital in growth regressions Impact of human capital in growth regressions  Coefficient of average years of schooling  Elasticity almost certainly above 0.6  Current best estimate around 0.9, i.e.  somewhat higher than private returns Some important caveats Some important caveats  Relative or absolute change in human capital?  Quantity vs quality of education?  Diminishing returns?

Human capital formation: A glimpse of the future Human capital formation: A glimpse of the future Source: The EU Economy 2003 Review, Chapter 3.

Moving Europe‘s productivity frontier Moving Europe‘s productivity frontier THE CONCLUSIONS Trend productivity slowdown has come to a halt, Trend productivity slowdown has come to a halt, but scant evidence for a structural turn-around. but scant evidence for a structural turn-around. Job-friendly reforms can and did have an impact, Job-friendly reforms can and did have an impact, yet productivity is not the enemy of employment. yet productivity is not the enemy of employment.  Considerable scope to boost productivity growth  Promoting innovation and knowledge building  Fostering human capital formation at all levels  The 5 th freedom: free movement of knowledge  Remove barriers to high-skilled migration

Thank you very much for your attention “Quality of Tertiary Education and the Economic Policy Agenda” Ljubljana, Slovenia, April 2, 2008