THE INTERACTION OF RESOURCE AND LABOUR PRODUCTIVITY Scientific background report to the Scoping Study Sustainable Europe Research Institute (SERI) bio by Deloitte on behalf of: European Commission, DG Environment Authors: Andrea Stocker, Stefanie Gerold, Friedrich Hinterberger (SERI) Anton Berwald, Sébastien Soleille, Valerie Anne Morgan, Elisavet Zoupanidou (bio by Deloitte) December 2015 The interaction of resource and labour productivity Content 1 Introduction/Motivation 4 2 Definitions 5 2.1 Resource productivity and resource efficiency 5 2.2 Other concepts of productivity 7 3 The storyline 8 3.1 Drivers of economic growth 8 3.2 The role of labour and resource productivity increases to improve the conditions for growth 10 4 Historical trends of labour, capital and resource productivities and their determinants 13 4.1 Productivity trends 13 4.2 Historical trends of resource productivity compared to economic growth and resource use 17 4.3 Development of resource prices 20 4.4 Share of material costs on whole production costs 22 5 How and to what extent does resource productivity contribute to economic growth? 25 5.1 Impacts of resource productivity on growth 25 5.2 Impacts of growth on resource productivity 26 6 How and to what extent does resource productivity contribute to environmental improvements and decreases in resource use? 29 7 How and to what extent does resource productivity contribute to job creation? 34 7.1 Theoretical and conceptual considerations 34 7.2 Experience from the past 37 7.3 Insights from scenario analyses 41 7.4 The impact of different types of drivers for resource productivity on employment 46 8 Sectoral data analysis of material versus labour and capital productivity 64 8.1 Data and Methodology 65 8.2 Resource, labour and capital productivity across sectors 73 8.3 Identification of drivers for resource productivity across countries 91 8.4 Policy relevant questions linking resource efficiency to jobs 99 8.5 Number of jobs and job potential 100 8.6 Implementing scenario analysis 103 8.7 Summary and conclusions of the empirical analysis 110 8.8 Limitations of the empirical analysis 112 9 Integration of resources and resource productivity in the economic model114 9.1 How are resources considered in growth theory? 114 SERI – Sustainable Europe Research Institute 2 The interaction of resource and labour productivity 9.2 Resource constraints 116 9.3 How are resources currently integrated in economic models? 119 9.4 What relevant aspects should be considered in order to properly integrate resources in economic models and better link resource productivity to jobs? 127 10 Summary and Conclusions 132 10.4 Historical trends 132 10.5 How and to what extent does resource productivity impact on growth and resource use? 134 10.6 How and to what extent does resource productivity impact on employment? 135 10.7 Conclusion from the literature review 141 10.8 What does the empirical analysis reveal? 142 10.9 How are resource use and resource productivity integrated in economic models? 144 11 Policy implications and recommendations 146 12 Limitations and further research needs 148 13 References 152 ANNEX 171 Annex 1: Development of labour productivity in the service sectors 171 Annex 2: Additional material and results from empirical analysis 173 SERI – Sustainable Europe Research Institute 3 The interaction of resource and labour productivity 1 Introduction/Motivation This final report summarizes the findings of the project „The interaction of resource and labour productivity”. The report addresses three main tasks: the assessment of existing empirical studies regarding how resource productivity impacts employment, a sectorial data analysis of material versus labour and capital productivity, the integration of resource productivity in the economic model. The main messages and findings of these tasks are summarized and con- nected to each other in an extra document (titled as “scoping study”), based on a storyline that refers to the relationships between resource productivity and labour productivity, economic growth, employment and resource use. This scoping study also draws common conclusions to show how resource policies could be better integrated in economic policy making and provides information about the limitations as well as further research needs. The purpose of this scoping study is to work out how resource efficiency affects labour productivity and employment. The link is analysed on an em- pirical and a conceptual basis focussing on the macro-economic and secto- rial level. The study looks for real-life evidence in business and the economy as well as for conceptual arguments in economic theory. It aims at taking stock and drawing lessons for better policies that both enhance resource efficiency and employment. While the scoping study presents the results in a very concise way – in the manner of an extended executive summary - this final report provides more information. The results are described for each of the three tasks respective- ly. Based on the overall findings we draw conclusions on how resource poli- cies could be better integrated in economic policy making in a clear and concise manner for decision makers. Finally, we identify the largest gaps and hence ideas for further research. This document is structured as follows: After a short theoretical and concep- tual explanation of the relationships that will be considered in this scoping study we present the historical trends of labour and resource productivity and its main determinants. Then, we analyse the effects of resource produc- tivity on growth, resource use and in particular on employment. After that we provide an empirical analysis in order to give an overview of the develop- ment of material use and of labour intensity in different Member States. The objective is to provide an analysis of different sectors on their material, la- bour and capital productivity, and to understand the reasons for differences across Member States. Furthermore, we explore the impact of material productivity on employment outcomes at the macro level. After that, we come back to theoretical considerations how to better integrate resource productivity in the economic model. Based on the overall findings we draw conclusions on how resource policies could be better integrated in economic policy making in a clear and concise manner for decision makers. Finally, we identify the largest gaps and hence ideas for further research. SERI – Sustainable Europe Research Institute 4 The interaction of resource and labour productivity 2 Definitions In order to interpret and compare the results, the exact meaning and defini- tion of the indicators must be clear. From the review one can conclude that the literature dealing with resource efficiency/productivity is fragmented, sometimes uses different definitions and misleading terms and conceptual unity is missing, which seems to hinder knowledge transfer within academics and from academics to policy makers (Besco 2014). 2.1 Resource productivity and resource efficiency The literature review focuses on the indicators resource productivity as well as resource efficiency. Although these two terms are often used synony- mously, they do not mean the same thing. Resource efficiency focuses typically either on augmenting economic out- put with a given resource input (increasing resource productivity), or on min- imising resource input with a given economic output (decreasing resource intensity); or sometimes on both (as in the case of Factor x) (Gjoksi and Sedlacko 2011). Besides the amount of resource use, resource efficiency also covers the consumption of natural resources in relation to economic benefits and environmental impacts. This is reflected in “A resource-efficient Europe – Flagship initiative under the Europe 2020 Strategy“ (EC 2011), which aims at both decoupling resource use from GDP growth as well as decoupling environmental impacts from resource use (AMEC and BIO 2013). Resource productivity is the efficiency of using natural resources to pro- duce goods and services in the economy (Bleischwitz 2010). In analogy to labour or capital productivity it describes the relation between economic outputs in monetary terms and a physical indicator for material or resource inputs (OECD 2010). The monetary component refers to the economic gains achieved through efficiency. While the definition of resource productivity in general includes among oth- ers water, land, biodiversity and ecosystem services, in this scoping study resource productivity is defined as material productivity. Materi- als/material resources comprises biotic materials/biomass (from agriculture, forestry, fishery and hunting as well as biomass products) and abiotic mate- rial resources (metal ores and metal products; non-metallic minerals and mineral products; fossil energy materials/carriers used for energetic and non-energetic purposes) that are used in production processes or for energy production. As fossil fuels are also materials, they are also part of this scop- ing study. Depending on the scale of interest, resource productivity can be calculated at different levels. At the macro level (for whole economies), for example, GDP (Gross Domestic Product) is usually applied as the economic variable, while at the meso-level GVA (Gross Value Added) is most commonly used. In general, economy-wide material flow analysis (MFA) is applied to quantify the level of material and resource use. Thus, for representing the physical indicator for material or resource