1. THE PRODUCTIVITY PUZZLE 3 July 2017 Filippo DI MAURO Conference: “LIVING WITHOUT GLOBALIZATION?”

2. Outline Productivity puzzles and monetary policy implications
1 Steady decline of productivity: implications and reasons
Firm-level perspective
Conclusions

3. 1 – The productivity puzzle: steady decline of productivity

4. Recent Productivity developments

5. The impact of slower productivity
Lower potential output

6. The impact of slower productivity
Lower r*: Secular Stagnation

7. Possible explanations
Crisis-related scarring
Financial crises can have a permanent, or certainly persistent, scarring effect on output.
Forbearance and monetary policy
Productivity may have been held back by actions of the authorities, mainly regulatory forbearance and accommodative monetary policies.
Mis-measurement
Statistical mirage, failure to capture key elements
Slowing Innovation
ICT revolution is already quite mature and future progress is likely to be slower.
Diffusion Dynamics
Slower technological diffusion from best performers to rest of the economy.
Resource reallocation
Since the crisis, evidence for capital mis-allocation in Europe.

8. 2 – The productivity puzzle: a firm-level perspective

9. THE COMPNET PROJECT  USING FIRM LEVEL INFO
The 5th wave of the CompNet database
THE COMPNET PROJECT
 USING FIRM LEVEL INFO
Poland
France
Italy
Spain
Portugal
Germany
Romania
Finland
Estonia
Denmark
Czech
Republic
Slovakia
Malta
Latvia
Croatia
Belgium
CompNet – the Competitiveness Research Network - has built a dataset on productivity indicators based on firm level information
….which are comparable across the EU countries in the map (this is rather unique)
(1): years and countries available in the last round in comparison with Eurostat

10. The rational of firm-level perspective
A firm-level perspective
The rational of firm-level perspective
Why do we need a firm-level perspective?
Firm performance distribution is very disperse and asymmetric.
Rather than most firms around an “average” performance, there are lots of firms which have low productivity and only a few which are very productive in the “right-tail” of the distribution (the so called “happy few”).
Labor productivity distribution across countries
Germany
Spain
France
Italy
Source: CompNet (2017)

11. The rational of firm-level perspective
A firm level perspective
The rational of firm-level perspective
Why do economists care about firm heterogeneity?
Evolution of labor productivity distribution in France
Because they care that resources (capital and labor) are reallocated from low to high productive firms, in order to increase the economy aggregate performance.

12. Frontier firms are diverging
Location,
CompNet Contributions: frontier and laggards
Labour productivity of frontier and non-frontier firms
(annual labour productivity growth, 2002=1)
Manufacturing
Services
Manufacturing
Note: The Euro Area non-frontier productivity dynamics is computed as productivity growth of the median firm in each 2-digit sector aggregated with value added weights to the country level. Unweighted average of developments in BE, FI, FR, IT and ES. Sample is based on firms with more than 20 employees.
Name of the Author

13. Is Resource allocation improving thus helping closing this gap?
After the crisis credit constraints are increasing for less productive firms (good sign)
Least productive
Most productive
Share of credit constrained firms by deciles of labor productivity Source: CompNet

14. Capital Productivity dispersion over time
Resource allocation
….BUT, aggregate capital allocation seems to be worsening
Capital Productivity dispersion over time
Source: CompNet

15. 3 – Conclusions

16. Conclusions
Uncertainty on the outlook for productivity adds to the complexity of monetary policy as decreases our ability to firm up potential estimates and appropriate interest rate patterns
The macro view on productivity hides the large and growing discrepancy among firms, the one thriving and the rest.
It is the extent in which such divergence will diminish, which is key for the overall aggregate measured productivity
We have to look therefore on evidence on resource reallocation dynamics. Is the firm selection process proceeding as it should?
Evidence available is still mixed. Further efforts are needed to gather more granular information
COMPNET…

17. Reserve Slides

18. U.S. GDP since 1890
The was an enormous increase in U.S. output since 1890, by a factor of 46.

19. Evolution of labor productivity and labour cost in France
Dangerous effects
Policies need to take this heterogeneity into account
Evolution of labor productivity and labour cost in France
Salari ancorati all’inflazione. Un disastro per le imprese meno produttive
L productivity (2003=1)
L cost (2003=1)
ULC (2003=1)
High productive firms:
L productivity (2003=1)
L cost (2003=1)
ULC (2003=1)
Low productive firms:

20. Sources Haldane, Andy (2017) - Speech on “Productivity puzzles”, March
Draghi, Mario (2017) – Speech on ‘Fostering Innovation and Entrepreneurship in the Euro area’, March
Competitiveness Research Network –

21. Sources of US GDP Growth (% p.a.)
is a golden era of growth
TFP the largest contributor
Labor force the second one
Sharp slowdown in 1970s, with negative (!) TFP growth
Likely cause: oil price shocks
Firms reduced energy usage, thus reducing output per same K, N
Resurgence of growth since early 1980s, particularly from mid-1990s
ICT revolution:
Higher investment
Higher productivity growth
Edward Denison, BLS

22. A firm level perspective
Frontier firms are diverging
Access to international markets is critical
Exporters Productivity Premium

23. The productivity puzzle: explanations
Crisis-related scarring
Financial crises can have a permanent, or certainly persistent, scarring effect on output.
First, via a collapse in credit availability constraining firms growth
As credit conditions have eased recently, however, this has become a less compelling explanation for persisting productivity problems.
A second financial channel is asset prices. A fall in property prices tightens the collateral constraint and credit conditions for firms. As asset prices have recovered, however, this channel cannot explain the persisting productivity puzzle.
Resource reallocation
Since the crisis, evidence for capital mis-allocation in Europe (see Spain).
Since the crisis also rates of labor market churn between companies have been low and dispersion in rates of return across sectors has been high. Both are consistent with lower rates of factor reallocation having contributed to low productivity.

24. The productivity puzzle: explanations
Forbearance and monetary policy
Productivity may have been held back by actions of the authorities, mainly regulatory forbearance and accommodative monetary policies.
By supporting low-productivity firms, that would otherwise fail, policy actions may have prevented the “creative destruction” thus hampering the correct functioning of the markets.
Certainly, the level of company liquidations and firm exits has remained low in many countries since the financial crisis, probably lower than would have been expected given the GDP path.
Mis-measurement
Statistical mirage, failure to capture key elements
Studies, however, find that mismeasurement alone is unlikely to account for the productivity puzzle (see Syverson (2017))
Most mismeasurement problems existed before productivity slowdown.
These problems would need to have increased dramatically – and probably unrealistically – to fully explain the productivity slowdown.

25. The productivity puzzle: explanations
Slowing Innovation
The technological progress that backed up the productivity growth over the past two centuries may not continue at the same pace in the future (Gordon)
Current wave of innovation, grounded on ICT, does not have the same potential as past innovations.
ICT revolution is already quite mature and future progress is likely to be slower.
However, there are many emerging technologies with the potential to revolutionize the economy, such as robotics, artificial intelligence, Big Data and the human genome
Diffusion Dynamics
It arises not from slower rates of innovation, but from slower rates of technological diffusion from best performers to the rest of the economy
Might be due to:
Stifled competition in certain sectors which may have prevented the trickle-down of innovation,
management failings of small/less productive companies.

26. A firm level perspective
Frontier firms are diverging
Most productive firms captures almost all exports
Largest and most productive firms are less sensitive to exchange rate fluctuations
Higher dispersion of productivity lowers export elasticities
Notes: *** p<0.01, ** p<0.05, *p<0.10. Includes controls for macro determinants and sector/firm characteristics.