DANISH DURING THE UPSWING

Rasmus Mose Jensen and Casper Winther Nguyen Jørgensen, and Monetary Policy

INTRODUCTION AND SUMMARY in-sector shifts boosted productivity growth by 0.7 percentage point. Productivity is a key driver of economic growth. A comparison of the survival rate of firms during However, productivity growth in the Danish econ- various recessions also indicates that the low level omy, measured by gross value added, GVA, per of interest rates may have prevented productivi- hour has been weak since the financial crisis. This ty-enhancing reallocation of production resources is especially the case from the 2nd half of 2015 and and dampened productivity growth during the up- onwards when the decoupling of output and the swing. Moreover, productivity growth is also curbed labour market situation calls into question future by lower capital intensity, both as a result of the productivity growth and the actual sustainability structural shift from manufacturing to services and of the growth in employment seen during the last due to the limited level of investment in recent years. year or so. Nevertheless, the wage share of the Productivity growth is not the only source of employment-intensive private non-primary sector enhanced prosperity. For a prolonged period of excluding transport does not indicate a general time, Denmark’s terms of trade have been improv- imbalance between productivity and wages. The ing substantially and the return on foreign assets adjustment for fluctuations related to the trans- has been increasing. This has expanded consump- port industry reflects that this industry is currently tion opportunities and brought greater prosperity, characterised by declining earnings in shipping, even if productivity growth has been weak. In prac- which has a limited content of domestic employ- tice, distinguishing between quality improvements ment. Consequently, the increase in employment and price developments can be difficult. The analy- is currently assessed to be sustainable, albeit with sis finds that nominal value added per hour in the potential regional and industry-specific differences. non-primary sector has increased more than real The low productivity growth of the Danish productivity compared with previous upswings. economy as a whole is attributable to a series of In principle, the slowdown in productivity factors. Since the mid-2000s, declining North Sea growth may reflect temporary fluctuations as well activity has been reducing productivity growth for as factors of a more structural nature. Danmarks the overall economy by around 0.3 percentage Nationalbank’s projection is based on an assump- point per year. In addition, during the upswing tion of gradual restoration of productivity growth employment growth has been higher in industries over the next couple of years to a level more or with below-average productivity. This, in itself, less matching the long-term level since the mid- contributes to weaker aggregate productivity 1990s. In the coming years, sector shifts and lower growth. The analysis finds that between-sector capital intensity may put more downward pres- shifts reduced productivity growth in the private sure on productivity growth than assumed in the non-primary sector by 0.3 percentage point per projection. This would entail a long period of low year from 2011 to 2015. On the other hand, with- growth.

DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 39 Productivity growth in the Danish economy 1970-2015 Chart 1

Per cent, year-on-year

8

6

4

2

0

-2 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Note: The chart shows real GVA per hour. Shaded areas indicate periods of economic downturn, cf. Pedersen et al. (2015). Source: Statistics Denmark.

WEAK DANISH DECLINING NORTH SEA PRODUCTION PRODUCTIVITY GROWTH CONTRIBUTES TO WEAK PRODUCTIVITY GROWTH DURING THE UPSWING The modest productivity growth of the Danish economy as a whole is, to some extent, attributa- A prolonged trend of low productivity growth in ble to declining North Sea activity since the mid- Denmark seems to have been reinforced in the 2000s. The fall means that the high level of GVA wake of the financial crisis. Real productivity in per hour that characterises oil and gas extraction terms of GVA per hour for the entire economy has less and less weight in the total productivi- has not grown for the last five years, cf. Chart 1.1 ty of the economy. Viewed in isolation, this has Productivity growth was particularly weak in the weakened productivity growth by approximately 2nd half of 2015 when the gross domestic prod- 0.3 percentage point in recent years, cf. Chart 3. uct, GDP, stagnated following eight quarters of Although declining North Sea production con- steady growth. The slowdown would seem to be tributes to the moderate productivity growth, it in contrast to a strong labour market with rising constitutes a longer-term trend, which does not employment and falling unemployment, which has imply a structural productivity challenge for the continued into 2016, cf. Chart 2. Weak productivi- economy in general. Thus, in the remaining part ty growth is not an isolated Danish phenomenon, of the analysis, the focus will be primarily on the but very much part of an international trend. private non-primary sector, i.e. the market-related Thus, most of our usual European benchmark part of the economy less raw material extraction, countries have experienced lower productivity housing and agriculture.2 growth since the crisis, cf. Box 1.

1 There are several relevant productivity measures. This analysis gen- 2 This delineation is assessed to give the truest and fairest view of erally focuses on hourly productivity, i.e. output measured by GVA in underlying productivity growth. Mining and quarrying, agriculture volumes divided by the number of hours worked. and housing tend to experience wide fluctuations in productivity and have a relatively limited employment content. Public sector productivity measurement is subject to uncertainty, given that the output is not sold in a market and thus does not necessarily reflect the consumers’ assessment of the quality. Consequently, the focus is on the market-related part of the economy.

40 DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 Weak productivity growth in the post-crisis period is an international phenomenon Box 1

Subdued productivity growth is not an isolated Danish Productivity growth may be further hampered by less phenomenon. Thus, productivity growth has also slowed dynamic resource reallocation, for example due to fewer in our European benchmark countries in the wake of the business openings and closures, as is the case in the USA, financial crisis, although the trend is particularly pronounced and less knowledge dissemination. An OECD study (2015) in Denmark, cf. the chart. finds that innovative technology firms continue to experi- Several possible explanations have been offered for the ence strong productivity growth. It is the pace of knowledge declining productivity growth in the advanced economies. dissemination from high-productivity firms to less productive For instance, private investment dropped to low levels due firms which has slowed down. to the need for consolidation among firms, a decline in Another explanation is linked to measurement errors, demand and increased uncertainty in the aftermath of the for instance due to technological advances where online financial crisis, cf. Kramp and Pedersen (2015). This may have shopping, free web applications and quality improvements contributed to dampening productivity growth. Moreover, of e.g. smartphones may be difficult to measure. several advanced economies are gradually undergoing a transition in which less capital-intensive services sectors account for a growing share of employment.

International productivity growth

Private sector excluding housing and agriculture

Avg. annual growth, per cent 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Den. Fin. Ger. Neth. Swed. UK EU-19 1995-2010 2011-2015

Note: EU-19 covers euro area member states. Source: OECD.

Weak productivity growth since the crisis has amplified the Others take a more optimistic view of the future, including debate about whether future technological advances will Brynjolfsson and McAfee (2011), Byrne et al. (2013) and make substantial contributions to productivity growth. Gor- Miller and Atkinson (2014). They argue, inter alia, that we don (2012), among others, argues that the productivity gain are still in the early stages of a process in which digitisation from technological advances has diminished and will not will continue to produce efficiency gains in individual sectors necessarily increase in the future. According to Gordon, the of the economy, while interconnected innovations and technological breakthroughs of the 19th and early 20th cen- spin-offs will be the source of increased productivity growth turies, for instance electricity and the internal combustion in the future. However, history shows that technological engine, boosted productivity more than the breakthroughs breakthroughs and their impacts on productivity growth are of recent decades, including flat screen televisions, smart- subject to considerable uncertainty. phones, etc.

DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 41 Output and employment in the Danish economy Chart 2

Output and employment Hourly productivity Index, 2012 = 100 Index, 2012 = 100 104 102

103 101 102 100 101 99 100 98 99 98 97

97 96 2010 2011 2012 2013 2014 2015 2016 95 GDP Employment 2010 2011 2012 2013 2014 2015 2016

Note: Right-hand chart: Productivity is measured as GVA per hour for the whole economy. Source: Statistics Denmark.

reduction in sea transport during 2015. In manu- Contribution to overall productivity Chart 3 growth from mining and quarrying facturing , productivity has generally been in- creasing in recent years, albeit with some volatili- Percentage points ty. Productivity in information and communication 0.4 has been rising steadily for a long period of time.

0.2 PRODUCTIVITY GROWTH HAS BEEN PARTICULARLY 0.0 SLUGGISH DURING THE CURRENT UPSWING Sluggishness in the adjustment of labour often -0.2 entails more intensive resource utilisation among -0.4 firms as demand picks up. Thus, productivity will tend to increase the most in the early stages of -0.6 95 97 99 01 03 05 07 09 11 13 15 a cyclical recovery. However, this does not seem to be the case during the current upswing in

Note: The broken line indicates a simple average since 2006 which productivity in the non-primary sector has when North Sea production began to decrease. been very modest, cf. Chart 5 (left). As capacity Source: Statistics Denmark. pressures build during the upswing, persons with a weaker attachment to the labour market will typically account for a larger share of the growth SUBDUED PRODUCTIVITY GROWTH in employment, which normally dampens produc- IS BROADLY BASED ACROSS INDUSTRIES tivity growth. Sluggish productivity growth during the upswing In practice, distinguishing between quality is broadly based across the non-primary sector, improvements and price developments can be but seems to be particularly pronounced in con- difficult, especially at industry level, cf. Danish struction, finance and insurance and trade and Productivity Commission (2013). Nominal value transport, etc., cf. Chart 4.3 Part of the decline added per hour in the private non-primary sector in trade and transport, etc., probably reflects a has risen more than real productivity compared with previous upswings, cf. Chart 5 (right). Espe- cially manufacturing and finance and insurance 3 Productivity developments at industry level, especially in construc- have benefited from relatively favourable price tion, may be subject to statistical uncertainty, cf. Danish Productivity Commission (2013). developments.

42 DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 Aksetitel 140 Productivity development in the private non-primary sector, broken down by industry Chart 4

120 Index, 2010 = 100 Index, 2010 = 100 130 130 100 125 125

12080 120

115 115 60 110 110

10540 105

10020 100 95 95 0 90 90 10 11 12 13 14 15 16 10 11 12 13 14 15 16

Manufacturing Business services Trade and transport, etc. Finance and insurance Information and communication Construction

Note: The chart is based on GVA per hour for industries in the private non-primary sector, excluding some small industries. In the non-prima- ry sector, the industries’ share of GVA is: manufacturing 22 per cent; trade and transport, etc. 28 per cent; business service 13 per cent; finance and insurance 10 per cent; information and communication 7 per cent; and construction 7 per cent. Source: Statistics Denmark and own calculations.

Real and nominal hourly productivity in the private Chart 5 non-primary sector during economic upswings Start af opsving = 100 125 Real hourly productivity Nominal hourly productivity Start of an upswing = 100 Start of an upswing = 100 125120 125

120115 120

115 115 110 110 110 105 105 105

100 100 100

9595 95 1 13 25 37 49 115 136 157 178 199 2110 2311 2512 2713 14 15 16 17 181 319 520 721 92211231324152517261927212823 25 27

Q2 93 – Q1 00 Q4 03 – Q4 07 Q2 13 – Q1 16

Note: Productivity is defined as real and nominal GVA per hours worked, respectively, in the private non-primary sector. The definition of upswing periods follows Pedersen et al. (2015). Source: Statistics Denmark.

DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 43 SECTOR SHIFTS CONTRIBUTE TO Increase in the number of hours Chart 6 WEAK PRODUCTIVITY GROWTH worked in the private non-prima- ry sector 2012-15 Productivity growth in individual industries naturally has an impact on aggregate productiv- Per cent ity developments in the economy. However, the 7 relationship is not necessarily one-to-one, given 6 that aggregate productivity growth also depends 5 on the relative sizes of the industries and their 4 levels of productivity. Even if no individual indus- 3 try experiences productivity growth, productivity 2 growth could still be achieved for the economy as 1 a whole by shifting resources to more productive 0 industries and vice versa. Industries with low GVA per Industries with high GVA hour per hour

THE GROWTH IN EMPLOYMENT

IS MAINLY IN SERVICES Note: An industry is assessed to have high GVA per hour if it Throughout the upswing, the increase in employ- exceeds the average of the private non-primary sector. Source: Statistics Denmark and own calculations. ment has occurred primarily in the private sector where the number of hours worked has increased by around 5 per cent since 2012. This means that just under half of the decline in hours worked or changes in underlying trends. As a case in from 2008 to 2012 in the private sector has been point, deductibility of home repairs and im- reversed over the past three years. The rise is provements has presumably contributed to shift- broad-based, but seems to be particularly pro- ing demand to construction and cleaning, both of nounced among industries with low GVA per hour, which have relatively low GVA per hour. Growing cf. Chart 6. A few industries have experienced an online trade may also have helped to increase actual contraction in employment. These include employment in postal and courier services. industries with high GVA per hour, such as finance and insurance where the number of hours worked SECTOR SHIFTS HAVE DAMPENED PRODUCTIVITY has decreased in recent years. GROWTH DURING THE UPSWING Some industries, especially in the services When an industry such as business services, with sector, have contributed more to a higher number relatively low GVA per hour as a whole, accounts of hours worked, cf. Table 1. These include em- for an increasing share of employment, this per ployment and temp agencies, cleaning and other se contributes to weaker aggregate productivity operational services, hotels and restaurants, postal growth, cf. Chart 7.4 Similarly, viewed in isolation, and courier services, wholesale trade and educa- the decrease in employment in, for instance, tion-intensive sectors such as lawyers, account- finance and insurance has contributed to lower ants, architects and engineers. In construction and aggregate productivity growth, since GVA per the pharmaceutical industry, the number of hours hour is generally relatively high5. worked has also increased substantially. A decomposition indicates that between- In some sectors, developments in employment sector shifts alone detracted 0.3 percentage may be affected especially by political measures point from productivity growth in the non-primary

4 Business services comprise the industries travel agents, cleaning and other operational services as well as knowledge-based services.

5 A sector shift may occur both as a result of a change in the allocation of industries’ share of hours worked and as a result of new rela- tive prices. If a high-productivity industry experiences a relatively deterioration in prices, this may lead to lower aggregate productivity growth, given that it subsequently has less weight in the total output of the economy.

44 DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 Increase in hours worked, broken down by industry 2012-2015 Table 1

Increase in Share of total increase Per cent hours worked in hours worked

Travel agents, cleaning and other operational services 16 19

Knowledge-based services 10 18

Construction 8 16

Hotels and restaurants 15 12

Manufacturing 3 11

Transport 5 9

Trade 2 9

Other industries 0 6

Note: The table is based on figures for the whole economy. The industry travel agents, cleaning and other operational services includes, inter alia, temp agencies, while knowledge services include lawyers, accountants, architects, engineers, etc. Collectively, travel agencies, cleaning and other operational services and knowledge services are referred to as business services. In addition to postal and courier services, transport also includes shipping and air transport as well as land transport, while trade includes car sales, wholesale and retail trade. Collectively, hotels and restaurants and trade are often referred to as trade, etc. Source: Statistics Denmark.

Sector shifts in the private non-primary sector during the upswing Chart 7

400 Negative contribution Finance and Positive contribution insurance

200

Information and communication Manufacturing Transport 0 Business services Culture, recreation and other services Trade etc. Construction

(deviations in kr. from average) from in kr. (deviations -200 The industry’s GVA per hour in 2012 GVA The industry’s

Positive contribution Negative contribution -400 -1.0 -0.5 0.0 0.5 1.0 Change in the industry’s share of the number of hours worked, 2012-2015 (percentage points)

Note: The chart focuses on industries in the private non-primary sector, excluding some small industries. The shaded area indicates that sector shifts have contributed negatively to aggregate productivity growth. The sizes of the bubbles are proportional to the industries’ share of nominal GVA in the private non-primary sector. Trade, etc. includes trade, hotels and restaurants. Source: Statistics Denmark and own calculations.

DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 45 such as machinery and buildings and on other Chart 8 Decomposition of productivity growth resources in the economy such as the quality in the private non-primary sector and educational level of the labour force. To take Percentage points these factors into account, productivity can be 1.5 decomposed into contributions from observable input factors and total factor productivity, i.e. the 1.0 portion of productivity growth that cannot be im- 0.5 mediately explained by input factors. Total factor productivity includes technical advances in the 0.0 broad sense of the word, but also between-sector

-0.5 shifts. 1995-2010 2011-15 Results indicate that reduced capital intensity Contributions from sector shifts has contributed to declining productivity growth Within-sector contributions Total productivity growth in the Danish economy since the mid-1990s, cf. Chart 9, partly reflecting a structural shift from

Note: The decomposition used is based on the approach in manufacturing to services. There are indications Tang and Wang (2004). A simple average of annual that the trend towards lower capital intensity has growth contributions is used. Source: Statistics Denmark and own calculations. accelerated during the upswing, for instance as a result of subdued investment activity after the crisis. The decline in productivity growth should also, to a great extent, be attributed to the cessa- tion of strong growth in total factor productivity, sector each year from 2011 to 2015, cf. Chart 8. the reason for which is not clear. This indicates that between-sector shifts have, Part of the explanation could be that the surviv- to some extent and to a greater extent than al rate of firms has been relatively high after the previously, contributed to weak productivity financial crisis compared with earlier recessions. growth during the upswing. Sector shifts may re- This is likely to have weakened productivity-en- flect efficient adjustments to changes in demand hancing reallocation of economic resources, cf. patterns that are appropriate from an overall per- Box 2. spective, although they may, in the first instance, have a negative impact on productivity growth at the macro level. Viewed in isolation, within-sector productivity Contributions to hourly productivity Chart 9 growth boosted productivity growth by 0.7 per- growth centage points from 2011 to 2015. However, this Percentage points is less than previously, which also contributed to 4 weaker productivity growth in the private non- 3 primary sector6. 2

LOWER CAPITAL INTENSITY DAMPENS 1 PRODUCTIVITY GROWTH 0 Labour productivity refers to the amount of output produced per hour, without taking the -1 1970-94 1995-2010 2011-14 use of any other production factors into account. Total factor productivity Level of education However, efficiency in the production of goods Other capital intensity IT capital intensity Total productivity growth and services also depends on firms’ capital stock

Note: The chart shows a simple average of annual growth 6 The decomposition of productivity growth into contributions from contributions to productivity in the market economy sector shifts and within-sector productivity developments is based on measured by at factor cost, 16 individual industries in the private non-primary sector, for which GDPFC, per hour. data is available until and including 2015. The calculation does not Source: Statistics Denmark. take possible within-sector shifts into account.

46 DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 Is the low level of interest rates buoying up low-productivity firms? Box 2

The establishment of new firms and closure of old ones can be used by more productive firms during a subsequent are important aspects of the dynamic resource allocation economic upswing. process to ensure that production is optimised. Econom- Six years after the financial crisis, the survival rate of ic growth is not just about the creation of new jobs and firms in the private non-primary sector has been higher than firms – it also entails that a number of existing firms and during the downturn in the early 2000s, cf. the chart. This jobs become superfluous and disappear. Lower demand in is despite the fact that the negative shock to the economy an economic downturn tends to stimulate this adjustment in 2008 and the subsequent recession were considerably process. The reason is that corporate earnings are reduced, stronger. A key difference between the two periods is that which may lead to employment reductions or defaults, the current level of interest rates is lower, which may have especially among low-productivity firms. This will have a helped to buoy up highly leveraged, low-productivity firms negative short-term economic impact on the economy, but and prevent productivity-enhancing allocation of economic in the process resources and labour will be released, which resources.

Indeks, t = 100 Share of surviving firms in the private non-primary sector and GDP during various economic downturns 110

Share of surviving firms GDP per capita

Per cent Index, t = 100 105 110 100

95 105 100 90

85 100

8095 95 75

7090 90 t tt+1 t+2 t+1t+3 t+4 t+2t+5 t+6 t+3 t t+4t+1 t+2 t+5t+3 t+4 t+6t+5 t+6

2000 2007

Note: On the x-axis, t denotes the first year of the downturn. Only firms with at least 10 employees are included. A detailed description of the sample is provided in Kuchler (2015). Source: Own calculations based on firm data for the private non-primary sector from Statistics Denmark.

SUSTAINABLE EMPLOYMENT employment is sustainable or not7. If productivity GROWTH is out of sync with firms’ prices relative to hourly wages, the wage share will be increasing. Thus, in principle, wage increases are compatible with NO INDICATIONS OF IMBALANCE BETWEEN DE- unchanged productivity and will not, per se, result VELOPMENTS IN PRODUCTIVITY AND WAGES in adjustment of employment, provided prices The decoupling of output and the labour market rise similarly. situation calls into question future productiv- Wage share developments do not indicate a ity growth and the actual sustainability of the general imbalance in the employment-intensive growth in employment seen during the last year private non-primary sector excluding transport. or so. The wage share, reflecting the relationship The adjustment for fluctuations related to the between product real wages and productivity, transport industry reflects that this industry is can be used to assess whether the growth in currently characterised by declining earnings

7 Product real wages measure firms’ hourly payroll costs relative to the price of their products measured by the GVA deflator.

DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 47 Wage share in the private non-primary sector, excluding transport and selected industries Chart 10

The private non-primary sector, excluding transport Manufacturing

Pct. Pct. 66 70

64 65

62 60

60 55

58 50 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Construction Services Per cent Per cent 85 80

80 75

75 70 70

65 65

60 60 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Trade, restaurants and hotels Business services

Note: The broken line shows the historical average since 2000. Source: Statistics Denmark and Danmarks Nationalbank.

from shipping, which has a limited content of sectors with relatively low wage shares. This is domestic employment. Although the wage share particularly true of the pharmaceutical industry, in the private non-primary sector excluding trans- whose progress alone accounted for almost half of port has risen in recent quarters, there was a sim- the decrease in the manufacturing industry’s total ilar fall towards the end of 2014, and, viewed over wage share from 2008 to 2014.8 However, the wage a longer period, the wage share is in line with its restraint of recent years is also contributing to a average since 2000, cf. Chart 10. This indicates falling wage share in the manufacturing industry. low risk of labour market moderation, and the Construction is one of the industries experi- growth in employment is currently assessed to encing the greatest increase in the wage share be sustainable, albeit with potential regional and during the upswing. This indicates that capacity industry-specific differences. pressures are building, which is also underpinned The wage share in the manufacturing industry by labour shortage indicators. In the services has been declining in recent years. This is partly sectors, wage shares are high, seemingly trending attributable to a sector shift of activities towards upwards.

8 Data at detailed industry level is available only until 2014.

48 DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 WEAK PRODUCTIVITY DEVELOPMENT of trade, i.e. the prices at which Danish export- COULD LEAD TO A PROLONGED PERIOD ers are selling goods and services in the world OF LOW GROWTH market have increased more than the import In principle, recent productivity developments prices at which Danish households and firms are may reflect temporary fluctuations as well as buying. This, in combination with a high return on factors of a more structural nature. GDP growth foreign assets, has expanded consumption op- in Danmarks Nationalbank’s projection is based portunities and brought greater prosperity, even on an assumption of restoration of productivity if productivity growth has been weak. This is in growth to a level roughly matching the average contrast to the situation in several of our neigh- level since 1995, cf. Chart 11 (left). In the coming bouring countries, where the terms of trade have years, sector shifts and lower capital intensity been either constant or deteriorating, cf. Chart may put more downward pressure on productiv- 11 (right). Productivity gains are often passed on ity growth than assumed in the projection. If so, to consumers in the form of lower prices. When this will entail a prolonged period of low output countries have specialised in industries with high growth. If weak productivity growth persists over productivity growth such as IT and electronics the projection period, the expected increase in products, this is typically accompanied by down- demand will cause capacity pressures to tighten ward pressure on prices. This way, Denmark has faster than assumed. This may result in upward also benefited from productivity gains generated pressure on wages – and there is some scope for abroad. This has helped to ensure that the Danish this without the emergence of imbalances. The economy has performed in line with comparable possibilities of higher wage increases should be countries since 2007 when the focus is on pros- seen in light of persistently large current account perity developments in the broader sense of the surpluses. word, cf. Chart 12.

PRODUCTIVITY IS NOT THE ONLY SOURCE OF INCREASED PROSPERITY Productivity is a key driver of economic growth, but it is not the only source of increased pros- perity. For a prolonged period of time, Denmark has benefited from substantially improved terms

Danmarks Nationalbank’s projection and development in terms of trade Chart 11

Percentage points Index, 1995 = 100 6 120

4 110 2 100 0 90 -2

-4 80

-6 70 95 97 99 01 03 05 07 09 11 13 15 17 95 97 99 01 03 05 07 09 11 13 15 Employment growth Productivity growth Denmark Sweden GDP growth Germany Finland

Note: Left-hand chart: productivity is measured as GDP per employee. Source: Danmarks Nationalbank and Eurostat.

DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016 49 Development in per capita prosperity in various countries in the period 2007-14 Chart 12

Avg. growth from 2007-14 in GNI per capita for the population aged 20-64 years, adjusted for terms of trade, per cent p.a. 1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5 Finland UK Netherlands Sweden Denmark USA Germany

GDP Population aged 20-64 Terms of trade Capital income GNI

Note: “GNI” is average annual growth in the period 2007-14 in the real gross national income per capita for the population aged 20-64 years, adjusted for terms of trade. “Capital income” is the net return on foreign assets deflated by the index of import prices. Source: Statistics Denmark, Eurostat, U.S. Census Bureau, Bureau of Economic Analysis, U.S. Department of Commerce.

LITERATURE Kuchler, Andreas (2015), Firms’ leverage and investment, Danmarks Nationalbank, Monetary Byrne, David M., Stephen D. Oliner and Daniel E. Review, 3rd Quarter. Sichel (2013), Is the information technology revo- lution over?, International Productivity Monitor, No. Miller, Ben and Robert D. Atkinson (2014), Raising 25. European productivity growth through ICT, The in- formation technology & innovation foundation, June. Brynjolfsson, Erik and Andrew McAfee (2011), Race against the machine: How the digital revolu- OECD (2015), The future of productivity. tion is accelerating innovation, driving productivi- ty, and irreversibly transforming employment and Pedersen, Erik Haller, Rasmus Mose Jensen and the economy, Digital Frontier Press. Tina Saaby Hvolbøl (2015), Risks associated with the current upswing in the Danish economy, Ministry of Finance (2014), Finansredegørelse Danmarks Nationalbank, Monetary Review, 2nd 2014 (Financial Review – in Danish only). Quarter.

Gordon, Robert (2012), Is U.S. economic growth Danish Productivity Commission (2013), over? Faltering innovation confronts the six Danmarks produktivitet – hvor er problemerne? headwinds, National Bureau of Economic Research, (Danish productivity – where are the problems? Working Paper No. 18315. – in Danish only), Analyserapport 1.

Kramp, Paul Lassenius and Jesper Pedersen Tang, Jianmin and Weimin Wang (2014), Sources (2015), Why is investment so weak?, Danmarks of aggregate labour productivity growth in Canada Nationalbank, Monetary Review, 2nd Quarter. and the United States, The Canadian Journal of Economics, Vol. 37(2).

50 DANMARKS NATIONALBANK MONETARY REVIEW 2ND QUARTER 2016