1. [ 1 ] Productivity in Europe. From the expansion to the crisis Matilde Mas University of Valencia and Ivie World KLEMS Conference. Break Out Session: Europe Harvard, August 20, 2010

2. [ 2 ] Industrial Productivity in Europe: Growth and Crisis Editors: Matilde Mas & Robert Stehrer Edward Elgar Editors PART I. INTRODUCTION Mas, M.: Productivity in the advanced countries. From the expansion to the crisis Jorgenson, D.W., Ho Mun S. Samuels, J.D. and K. Stiroh: Industry Origins of the American Productivity Resurgence PART II. COUNTRY CHAPTERS Hans-Olof Hagén: Growth in the Nordic business sector O´Mahony, M, Nayman, L. Gorning, M. and B. Gorzig: Productivity transitions in large mature economies: France, Germany and the UK Kegels, Ch., Peneder, M. and H. van der Wiel: Productivity performance in Three Small European countries: Austria, Belgium and the Netherlands Havlik, P., Leitner, S. and R. Stehrer: Growth Resurgence, Productivity Catching-up and Labour Demand in CEECs. Mas, M., Milana, C. and L. Serrano: Spain and Italy: catching up and falling behind. Two different tales of productivity slowdown Fukao, K., Miyagawa, T., Hak K. Pyo and K. Hee Rhee: Estimates of Multifactor productivity, ICT Contributions and Resource reallocation effects in Japan and Korea

3. [ 3 ] Industrial Productivity in Europe: Growth and Crisis Editors: Matilde Mas & Robert Stehrer Edward Elgar Editors PART III. SPECIFIC TOPICS Landesmann, M. Leitner, S. Stehrer, R. and T. Ward: Skills and industrial competitiveness Esposito, P. and R. Stehrer: Effects of High-Tech Capital, FDI, and Outsourcing on Demand for Skills in West and East Kangasniemi, M., Mas, M., Robinson, K. and L. Serrano: The economic impact of Migration. Productivity Analysis for Spain and the UK Van der Wiel, H. Creusen, H. van Leeuwen and E. van der Pijll: Cross your border and look around Hyun Jeong Kim and Hak K. Pyo: International comparison of Productivity in Market Services: Korea with EU KLEMS Member countries Oulton, N. and A. Rincón-Aznar: Rates of return and alternative measures of capital input: 14 countries and 10 branches, 1971-2005 Inklaar, R. and M.P. Timmer: Productivity Convergence Across Industries and Countries: The Importance of Theory-based Measurement.

4. [ 4 ] Productivity in Europe. From the expansion to the crisis Topics that we deal with in this presentation: 1.Labor productivity from a long run perspective 2.The impact of the economic crisis started in 2007 3.Productivity from an industry's perspective 4.Sources of productivity growth: the relevance of the new information and communication technologies (ICT) We will compare the EU results with that of the USA and Japan

5. [ 5 ] 1. Labour productivity from a long run perspective

6. [ 6 ] Labor productivity from a long run perspective Labour productivity can grow following different patterns: The USA followed a virtuous path: strong GVA growth together with employment creation and productivity growth. The EU-25 has also followed a positive path, less brilliant however, in terms of GVA and productivity growth. The New Member States had a strong GVA and productivity performance but hardly any employment creation. Japan also showed a positive rate of productivity growth but originated in employment destruction. GVA, hours worked and labour productivity. Annual rate of growth. 1995-2009 (percentage) Source: TCB (2010) and EU KLEMS (2009).

7. [ 7 ] Labor productivity from a long run perspective The EU-25 is made up of a heterogeneous array of countries The New Member States (EU-10) are the ones that have experienced the highest rate of productivity growth. In the EU-15 Ireland had the highest rate and Italy the lowest. Labour productivity. Annual rate of growth. EU-25. 1995-2009 (percentage) Source: TCB (2010) and EU KLEMS (2009).

8. [ 8 ] Labor productivity from a long run perspective In the Eurozone-12 unit labor cost had a positive sign which originated in wages growing at higher rates than productivity. In the USA unit labor cost growth rates were even higher despite its strong productivity growth, while Japan experienced an improvement in its competitiveness thanks to the slow rate of wages growth. Unit labour cost. Annual rate of growth, 1995-2009 (percentage) ¹ 1995-2008 for this country. Source: ECB (2010), EU KLEMS (2009) and Fundación BBVA-Ivie.

9. [ 9 ] 2. The impact of the crisis

10. [ 10 ] The impact of the crisis The first 3 years of the crisis hit Japan harder than the EU or the USA The contraction in terms of GVA was more intense in the EU-15 than in the USA, while the New Member states maintained a positive growth rate GVA. Annual rate of growth. 1995-2007 and 2007-2009 (percentage) Source: TCB (2010) and EU KLEMS (2009).

11. [ 11 ] The impact of the crisis Employment destruction has been very severe in Japan and the USA The EU was more in favor of labor hoarding (not in Spain!) with only minor adjustments in the new member states aggregate. Labour (hours worked). Annual rate of growth. 1995-2007 and 2007-2009 (percentage) Source: TCB (2010) and EU KLEMS (2009).

12. [ 12 ] The impact of the crisis The USA maintained its rate of productivity growth thanks to the intense reaction of its labor market, while in the EU-15 it had a negative growth rate as a consequence of labor maintenance. In Japan productivity slowed down in spite of its strong labor contraction Labour productivity. Annual rate of growth, 1995-2007 and 2007-2009 (percentage) Source: TCB (2010) and EU KLEMS (2009).

13. [ 13 ] The impact of the crisis All the EU-15 countries, with the only exception of Spain, have experienced a slowdown in labor productivity. In Spain its acceleration is due to strong employment destruction. Labour productivity. Annual rate of growth. EU-15. 1995-2007 and 2007-2009 (percentage) Source: TCB (2010) and EU KLEMS (2009).

14. [ 14 ] The impact of the crisis During the first 3 years of the crisis, unit labor cost decelerated in the USA (improving its competitiveness), while it accelerated sharply in Japan and even more in the Eurozone. Unit labour cost. Annual rate of growth. 1995-2007 and 2007-2009 (percentage) ¹ 2007-2008 for this country Source: ECB (2010), EU KLEMS (2009) and Eurostat (2010)

15. [ 15 ] The impact of the crisis During the crisis the wages of employed workers rose in all countries. In the Eurozone wages increased while productivity decreased, pushing up unit labor cost and thus reducing competitiveness. In the USA productivity growth was higher than wages growth, thus unit labor cost decreased. Unit labour cost. Annual rate of growth. 2007-2009 (percentage) ¹ 2007-2008 for this country Source: ECB (2010), EU KLEMS (2009) and Eurostat (2010)

16. [ 16 ] 3. Aggregate productivity from the industries perspective

17. [ 17 ] Aggregate productivity from the industries perspective Manufacturing has contributed positively to labor productivity growth, especially in the EU-10. The main difference between EU-15 and USA labor productivity growth is not to be found in Manufacturing but in the Services industries. The contribution of the Construction industry was either nil or negative in all groups of countries. Industries contribution to labour productivity growth. Market Economy. 1995-2007 (percentage) ¹ 1995-2006 for these areas or countries Source: EU KLEMS (2009). Agriculture and fishing Energy Manufacturing Construction Transport and storage and communication Financial intermediation and business activities Social and personal services

18. [ 18 ] Aggregate productivity from the industries perspective The slowdown of productivity in the EU-15 in the 1995-2007 period affected all sectors, being Construction the only one with a negative sign. The growth rate of Manufacturing was higher than in Market Services. The highest growth rate was shown by the Energy sector, followed by Manufacturing and Agriculture and Fishing. Labour productivity. Annual rate of growth. EU-15. Market Economy. 1970-1995 and 1995-2007 (percentage) Source: EU KLEMS (2009).

19. [ 19 ] 4. Sources of productivity growth: the relevance of new technologies (ICT)

20. [ 20 ] Sources of productivity growth… The higher labor productivity growth in the USA as compared with EU-15ex had a double origin: a higher rate of ICT capital deepening and a higher rate of growth of technical progress (MFP). Growth accounting.Labour productivity. Market Economy. 1995-2007(percentage) ¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom. ² 1995-2006 for this country. Source: EU KLEMS (2009). Labour composition ICT capital deepening per hour worked Non ICT capital deepening per hour worked TFP

21. [ 21 ] Sources of productivity growth… The countries belonging to the EU-15 that have experienced higher rates of productivity growth are also the ones showing: a higher rate of ICT capital deepening and/or a higher rate of growth of technical progress (MFP). Growth accounting.Labour productivity. Market Economy. 1995-2007(percentage) ¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom. ² 1995-2006 for this country. Source: EU KLEMS (2009). Labour composition ICT capital deepening per hour worked Non ICT capital deepening per hour worked TFP Ireland Finand Sweden USA Austria France Belgium Germany Denmark Spain Italy 0 1 2 3 4 5 Netherlands United Kingdom

22. [ 22 ] Sources of productivity growth… In the EU-15ex, Agriculture, Transport and Storage and Communication, and Manufacturing where the industries showing the highest contribution of MFP. On the contrary, the contribution of MFP was negative in Construction, Financial Intermediation and Business Activities, and Social and Personal Services. Growth accounting.Labour productivity. EU-15ex. Market Economy. 1995-2007(percentage) ¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom. Source: EU KLEMS (2009). Labour composition ICT capital deepening per hour worked Non ICT capital deepening per hour worked TFP 0 1 2 3 4 Market Economy Agriculture and fishing EnergyManufacturing ConstructionTransport and storage and communication Financial intermediation and business activities Social and personal services

23. [ 23 ] Sources of productivity growth… This is an important difference with respect to the USA where all the Services Sectors, including Financial Intermediation and Business Activities as well as Social and Personal Services experienced positive MFP contributions. Growth accounting. Labour productivity. USA. Market Economy. 1995-2007(percentage) Source: EU KLEMS (2009). Labour composition ICT capital deepening per hour worked Non ICT capital deepening per hour worked TFP 0 2 4 6 -2 -4 Market Economy Agriculture and fishing EnergyManufacturing ConstructionTransport and storage and communication Financial intermediation and business activities Social and personal services

24. [ 24 ] Sources of productivity growth… Industry classification according to ICT assets ICT producersICT non intensive users Electrical and optical equipment Agriculture, hunting, forestry and fishing Post and telecommunications Food products, beverages and tobacco ICT intensive users Textiles, textile products, leather and footwear Mining and quarryingWood and products of wood and cork Pulp, paper, paper products, printing and publishingRubber and plastics products Coke, refined petroleum products and nuclear fuelOther non-metallic mineral products Chemicals and chemical productsBasic metals and fabricated metal products Machinery, necConstruction Transport equipmentSale, maintenance and repair of motor veh. Manufacturing nec; recyclingRetail trade Electricity, gas and water supplyHotels and restaurants Wholesale tradePrivate households with employed persons Transport and storage Financial intermediation Business activities Other community, social and personal services

25. [ 25 ] Sources of productivity growth… The share of ICT producers industries is very small In the USA the share of the ICT related sectors (producers and intensive users) have a higher weight than in the other grouping of countries. Share of each grouping in GVA. Market Economy. 1995 and 2007(percentage) Source: EU KLEMS (2009). 0 20 40 60 80 100 ICT producers ICT Intensive users ICT non intensive users EU-25EU-15EU-10USAJapan 1995200719952007199520061995200719952006

26. [ 26 ] Sources of productivity growth… However, its contribution to productivity growth is much higher than its share in the aggregate. Especially in developed economies such as Japan and the USA Contribution of each sectoral grouping to labour productivity growth. Market Economy, 1995-2007 (percentage) ¹ 1995-2006 for these areas or countries. Source: EU KLEMS (2009). ICT producers ICT Intensive users ICT non intensive users EU-25EU-15EU-10¹USAJapan¹ 0 20 40 60 80 100 120

27. [ 27 ] Sources of productivity growth… The higher productivity growth rate in the ICT producing industries has its origin in its strong MFP growth. In the USA, the efficiency improvements have spilled over the ICT intensive sectors, while in the EU-15ex and in Japan the sectors other than ICT producers have benefited only slightly. Growth accounting. Labour productivity. Market Economy, 1995-2007 (percentage) A: ICT producers; B: ICT intensive users; C: ICT non intensive users. ¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom ² 1995-2006 for this country. Source: EU KLEMS (2009). Labour composition ICT capital deepening per hour worked Non ICT capital deepening per hour worked TFP ABCABCABC 0 2 4 6 8 10 -2 UE-15ex USAJapan¹

28. [ 28 ] Conclusions The set of 25 countries analyzed show very different patterns, as well as strength, of growth. During the expansion years the USA showed a virtuous profile, combining GVA and productivity growth together with employment creation. The EU-15 had a much modest profile, while the EU-10 benefited from both its initial laggard position and its integration in the EU. The consequences of the economic crisis The recent crisis starting in 2007 hit the geographical areas with different intensity. Japan was the country experiencing the highest GVA contraction, followed by the EU-15. Labor markets also responded different. The USA adjusted sharply to the change of the cycle, while the EU opted for hoarding labor. As a consequence, the USA maintained its previous productivity growth rate, while in the EU-15 it became negative.

29. [ 29 ] Conclusions Spain was the only EU-15 country that experienced a positive labor productivity acceleration in 2007-2009 originating in its strong employment destruction. Wages of employed people kept growing during the crisis, pushing up the unit labor cost in the Eurozone and Japan but not in the USA. As a consequence, the USA has gained competitiveness during those years. The importance of the industry's disaggregation Manufacturing has been an important source of productivity growth in all countries, especially in the New Member States However, what makes the difference between the USA and EU are not the Manufacturing industries but the Services Sectors. Growth in all countries has been driven by ICT capital deepening and MFP growth.

30. [ 30 ] Conclusions In the EU-15 and the USA the MFP growth was especially intense in Agriculture, Manufacturing and Transport and Communication. However, while in the USA all the Services Sectors showed a positive contribution of MFP in the EU it was strongly negative. ICT and productivity growth ICT producing industries have a small share in the aggregate but its contribution to productivity growth is very relevant, especially in the most developed countries. ICT producing industries have experienced a strong MFP growth in the EU-15ex, USA and Japan. However, there is an important difference. While in the USA its positive effects spilled over the other sectors of the economy (especially the intensive users), in the UE-15 its positive effects restricted to only the ICT producers.

31. [ 31 ] Productivity in Europe. From the expansion to the crisis Matilde Mas University of Valencia and Ivie World KLEMS Conference. Break Out Session: Europe Harvard, August 20, 2010