Productivity and International Firm Activities: What Do We Know? Joachim Wagner
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The Nordic Economic Policy Review is published by the Nordic Council of Ministers and addresses policy issues in a way that is useful for in- formed non-specialists as well as for professional economists. All articles are commissioned from leading professional economists and are subject to peer review prior to publication. The review appears twice a year. The journal is distributed free of charge to the members of the Nordic economic associations. The easiest way to subscribe to the NEPR is therefore to become a member of one of these associations, i.e., Denmark: Nationaløkonomisk Forening Finland: Taloustieteellinen Yhdistys Norway: Samfunnsøkonomene Sweden: Nationalekonomiska Föreningen. For institutional subscriptions, please contact [email protected]. Nordic Economic Policy Review Number 2 / 2011 Productivity and competitiveness Editors: Jakob B. Madsen and Anders Sørensen TemaNord 2011:570 Nordic Economic Policy Review Number 2 / 2011 Productivity and competitiveness TemaNord 2011:570 © Nordic Council of Ministers, Copenhagen 2011 978-92-893-2295-9 Print: Arco Grafisk A/S, Skive Cover: Pub.Unit/NCM Layout: Pub.Unit/NCM Copies: 5030 Printed on environmentally friendly paper This publication can be ordered on www.norden.org/order. Other Nordic publications are avail- able at www.norden.org/publications Printed in Denmark Nordic Council of Ministers Ved Stranden 18 DK-1061 København K Phone (+45) 3396 0200 Fax (+45) 3396 0202 www.norden.org Nordic co-operation Nordic cooperation is one of the world’s most extensive forms of regional collaboration, involv- ing Denmark, Finland, Iceland, Norway, Sweden, and three autonomous areas: the Faroe Islands, Greenland, and Åland. Nordic cooperation has firm traditions in politics, economics, and culture. It plays an important role in European and international collaboration, and aims at creating a strong Nordic communi- ty in a strong Europe. Nordic cooperation seeks to safeguard Nordic and regional interests and principles in the global community. Common Nordic values help the region solidify its position as one of the world’s most innovative and competitive places. Content The widening productivity gap between the EU and the US: An introduction to the conference on productivity and competitiveness Jakob B. Madsen and Anders Sørensen ....................................... 7 Up the hill and down again: A history of Europe’s productivity gap relative to the United States, 1950-2009 Bart van Ark ............................................................................... 27 Comment by Matti Pohjola ........................................................ 57 Regulation, resource reallocation and productivity growth Jens Matthias Arnold, Giuseppe Nicoletti and Stefano Scarpetta ................................................................. 61 Comment by Mika Maliranta ..................................................... 99 Human capital and productivity Angel de la Fuente .................................................................... 103 Comment by Pekka Ilmakunnas ............................................... 133 Productivity and international firm activities: What do we know? Joachim Wagner ....................................................................... 137 Comment by Markku Stenborg ................................................ 163 Innovation and productivity Bronwyn H. Hall ...................................................................... 167 Comment by Ari Hyytinen ........................................................ 205 A personnel economics approach to productivity enhancement Edward P. Lazear and Kathryn L. Shaw .................................. 209 Comment by Tuomas Pekkarinen............................................. 253 Productivity and education: Benchmarking of elementary and lower secondary schools in Denmark Peter Bogetoft and Jesper Wittrup ........................................... 257 Comment by Timo Kuosmanen ................................................ 295 The widening productivity gap between the EU and the US: An introduction to the conference on productivity and competitiveness ∗ ∗∗ Jakob B. Madsen and Anders Sørensen Summary This paper introduces the papers presented at the Nordic Conference on Competitiveness and Productivity and discusses them in relation to the widening productivity gap between Europe and the US since 1995. It is shown that productivity growth is driven by R&D, human capital and efficiency of production such as human resource management, government regulation, competition and openness. It is concluded that potential explanations for the widening productivity gap are low investment, inefficient use of information technology, compressed wage structure and deregulation of the otherwise regulated labor market in Europe. Keywords: Endogenous growth, productivity gap, convergence. JEL classification numbers: O1, O2, O4 . ∗ Department of Economics, Monash University, [email protected]. ∗∗ Corresponding author, Department of Economics, Copenhagen Business School, [email protected]. 8 Nordic Economic Policy Review, Number 2/2011 Over the last two centuries, trend productivity has been growing be- tween one and two percent in the US and the EU14 countries, where the EU14 countries consist of the 15 EU members in 2004 excluding Luxem- bourg (see Figure 1 for a country sample). Productivity is here measured as total factor productivity (TFP), where labor is measured as employment multiplied by annual hours worked and income and capital stock are meas- ured in purchasing power parities. Figure 1 shows that the US had been the productivity leader over EU14 during the last two centuries. This does not mean that the US was ahead of all EU14 countries during the entire period. The UK was more productive than the US in the nineteenth century; how- ever, the US took the lead in the early twentieth century. The productivity gap between the US and EU14 widened over the peri- od from 1820 to 1945 due to stronger increases in educational attainment and research intensity in the US than in EU14 (Madsen, 2010). Thereafter, the gap narrowed substantially up to mid 1995 due to technology spillovers through imports, a stronger increase in research intensity and educational attainment in EU14 than in the US, and catch-up to the technology frontier (Madsen, 2007, 2008). Figure 1. Total factor productivity Logs 2.8 2.6 2.4 2.2 2 1.8 1.6 1.4 1.2 1 0.8 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 EU14 USA Source : See Madsen (2010). Note : The EU14 countries consist of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden and the UK. The EU average is an unweighted average. The widening productivity gap between the EU and the US: An introduction 9 The productivity gap between the US and EU14 has widened since 1995, a question that this special issue is concerned about. The recent di- vergence raises the question as to why the catching-up process has stalled, why the productivity performance in Europe has been relatively poor since the mid 1990’s and whether the gap will continue to widen. Basically, the gap will continue to widen if structural and institutional factors in EU15 have permanently lowered the incentives to do R&D, if the R&D produc- tivity is slowing down in EU15 relative to the US, and if EU15 cease to take advantage of the technology that is produced in the US. The papers in this special issue examine these topics from a microeconomic and macro- economic perspective; both of which give important insight into factors affecting productivity. In this paper, we examine different factors that affect the absolute and relative productivities among the OECD countries and briefly discuss which factors highlighted in the contributed papers in this special issue suggest as potential answers. The next section sets the scene of the produc- tivity path in the US and EU15 and investigates macro issues related to this (Section 3). The micro issues are discussed in Section 4 and Section 5 concludes the paper. 1. The productivity puzzle Figure 2, which is from van Ark, shows the path of relative productivities between the US and EU15. The figure shows, in terms of productivity per hour worked, that EU15 was catching up with the US during the period 1950 to 1995; thereafter the relative productivities have diverged. In abso- lute terms, EU15 and the US both experienced high productivity rates dur- ing the period 1950-1973; thereafter, during the period 1973-1995, the growth rates slowed down considerably, particularly in the US. Van Ark finds that the labor productivity convergence in the period 1973-1995 was driven by convergence in capital intensity. The labor productivity growth rates recovered in the US after 1995 while they slowed down in the EU15 and, therefore, resulted in a reversal of the convergence that took place up to 1995. Van Ark argues that the slow labor productivity in Europe after 1995 may have been related to the loosening up of some labor market ri- gidities that have increased employment in EU15 more than in the US. Van 10 Nordic Economic Policy Review, Number 2/2011 Ark shows that the recent decline in labor productivity growth in EU15 has been dominated by a marked productivity growth slowdown in trade, fi- nance and business services. 1 Figure 2. Total economy GDP per hour worked and GDP per capita in EU15, 1960- 2009 (relative to the United States) 100% 90% 80% 70% 60% EU-15 as% level of EU-15 US 50% 40% 1960 1965 1970 1975 1980