Eric Bartelsman* Sep. 17, 2008 Warsaw, Poland *Vrije Universiteit Amsterdam, Tinbergen Institute, and IZA;. Sources of Productivity Growth Micro dynamics.

Eric Bartelsman*

Sep. 17, 2008

Warsaw, Poland*Vrije Universiteit Amsterdam, Tinbergen Institute, and IZA;.

Sources of Productivity Sources of Productivity GrowthGrowth

Micro dynamics and macro outcomesMicro dynamics and macro outcomes

Long-run Productivity GrowthLong-run Productivity Growth

Commodity Time to earn 1885 (hours)

Time to earn 2000 (hours)

Productivity multiple

1-speed bicycle

260 7.2 36.1

Office Chair 24 2.0 12.0

Hair Brush 16 2.0 8.0

Silver Spoon 26 34.0 0.8

Source: Brad DeLong, 1991-2000

Economic GrowthEconomic Growth

GDP = Hours worked X GDP/hour Economic growth is weighted sum of:

Growth in labor input Growth in labor productivity

Growth capital/labor ratio Growth in ‘total factor productivity’, or TFP

Innovation as ultimate source of TFP Manna from heaven or intentional creation

Inquiry into sources of Inquiry into sources of productivity growthproductivity growth

For whom is such academic research useful? Curiosity Economic policy Business sector

Productivity ResearchProductivity Research

Research methods traditionally have been macroeconomic Growth models

Solow: exogenous technology Romer: R&D (Human capital) as driver

Growth empirics Cross-country evidence Multi-industry panel data

Growth Accounting (EU-KLEMS)

Value added per hour EU relative to USValue added per hour EU relative to US (source: EU Klems, market sector, EU15)(source: EU Klems, market sector, EU15)

0.7

0.8

0.9

1

1.1

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

EU15 Hi EPL Lo EPL

Results from EUKLEMSResults from EUKLEMS

Nat.Acct. based Growth Accounting dataset• Based on seminal work by Jorgenson

Accounting framework for attributing productivity growth to factors of production

Framework to aid in integration of National Accounts (see Jorgenson and Landefeld 2005).

• attempt to attribute all growth in output to factors under control of firmsIn recent years much growth is not accounted for (TFP growth)

Differences in growth performance between US and EU visible, but not ‘understandable’

Particularly, the differences in the impact of ICT remain ‘a mystery’

Results from EUKLEMSResults from EUKLEMS

1995-2005

EU US

VA% --Kict --TFP VA% --Kict --TFP

Market 2.1 .4 1.0 3.7 .6 1.7

EleCom 3.8 .8 2.8 10.5 .8 8.7

MfgxElc 1.2 .2 1.7 1.8 .2 2.2

DISTR 2.6 .3 1.5 4.1 .5 2.1

FinBus 3.5 .9 -1.0 4.3 .7 .4

Source: Timmer, O’Mahony, and van Ark (2007)

Results from EUKLEMSResults from EUKLEMS

What we have not learned• Why is contribution from IT capital lower in EU

Or… Why is ICT investment lower

• Why is growth in ‘Elecom’ so much lowerOr… Why is ‘Elecom’ sector small, especially in fast growing

parts

• Why is unexplained growth so high? Why is TFP growth so much lower in EUOr… Why is TFP growth especially low in ICT intensive sectors

• What, if anything, is the role of policyOr… If policy affects firms and market interactions, what can

industry data tell us about policy

0

1000

2000

3000

4000

5000

6000

0 20 40 60 80 100 120 140

productivity

freq

uen

cy

Aggregate productivity depends not only on

firm-level productivity distribution…

Average productivity vs Average productivity vs aggregate productivityaggregate productivity

0

1000

2000

3000

4000

5000

6000

0 20 40 60 80 100 120 140

productivity

freq

uen

cy

But also on firm-size distribution

Average productivity vs Average productivity vs aggregate productivityaggregate productivity

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

firm i

sale

s

Businesses produce, not Businesses produce, not countries or industriescountries or industries

Heterogeneity in productivity at the firm-level within sectors or countires

A country may have a ‘long tail’ problem: Or, a lack of ‘excellent’ firms:

Global frontier

country2

country1

long tail

•Sectoral productivity may not be a useful policy Sectoral productivity may not be a useful policy indicatorindicator

Why analysis of firm-level dynamics Why analysis of firm-level dynamics may help answer questionsmay help answer questions

• Heterogeneous agents at micro levelDiversity in firm-level strategies

• Market selectionSales and input growth, conditional on productivity

and economic ‘environment’

• Combination of firm-level productivity impact and market share evolution gives total impact on industry productivity

Sources of productivity growthSources of productivity growth

Pushing out the frontier Increasing productivity below the

frontier Diffusion of technology Reallocating resources from low to high

productivity firms

Example: How to raise Example: How to raise productivity ‘below the frontier’productivity ‘below the frontier’

Diffusion of existing technology Human capital Competitive pressure Framework conditions

Reallocation of resources from less to more productive firms Frictions hamper efficient allocation Policy affects frictions in:

Product markets, labor market, entry/exit

Reallocation and productivityReallocation and productivity

Frictions impede reallocation to most productive firms

Frictions affect ‘selection’ of firms Who will enter, who will exit

‘Olley-Pakes cross-term’ measures the effect

i i

tittitittt PppNP ))(()/1(__

Hungary: allocative efficiency over the transition(cross-term of the Olley Pakes decomposition, manufacturing)

6.5

7

7.5

8

8.5

9

1995 1996 1997 1998 1999 2000 2001

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

total L productivity un-weighted L productivity Cross term (right scale)

Slovenia: allocative efficiency over the transition(cross-term of the Olley Pakes decomposition, manufacturing)

6.5

7

7.5

8

8.5

9

9.5

1993 1994 1995 1996 1997 1998 1999 2000 2001

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

total L productivity un-weighted L productivity Cross term (right scale)

Example: ICT AdoptionExample: ICT Adoption

• Carrot and Stick:Profits to be gained if succesful (taking into account

market share gains)

Competitive pressure: Market share/profit losses when others adopt successfully

• Costs and benefits:Readiness: skilled workers, high wages,

complementary inputs

Profits from being successful and scaling up business

Broadband Adoption and Broadband Adoption and ImpactImpact

0 1 2 3 4

0 1 1 2 1 3 1 4

: %

: % %

IT Nijt

ITijt

a v a a DSL a k a k a hrs dummies

b DSL b b w b Cap b HiSkl b Churn dummies

v (log) real value added

Kit ICT capital service

Kn Non-IT capital service

Hrs hours

w Average wage

Cap%it ICT-capital as share of cap.

HiSkl High skilled worker share

DSL% Broadband penetration

Churn Interquartile range of firm-level growth rate distribution

Broadband Adoption and ImpactBroadband Adoption and ImpactVariable DSL% Internet%

a1 ICT-indicator:

1.24 .90 1.20 1.05

a2 Kn .35 .27 .34 .27

a3 Kit -.07 .05 -.08 .05

a4 Hrs .72 .68 .72 .68

b1 w(-1) .24 .02 .30 .01

b2 Cap%it .31 .20 .32 .17

b3 HiSkl .18 .38 .19 .33

b4 Churn .30 .15 .28 .14

dummies c,t i,t c,t i,t

D.F. 659 646 649 646

Impact of Policy Impact of Policy on ICT and Productivityon ICT and Productivity

• Firms have capabilities and desire to ‘try’ new ways of meeting market demandSince mid-1990s, this experimentation is often through ICT

• Firms’ desire to experiment depend on carrot and stickLeveraging of successful investment through scale increase is

an enormous carrot

• Policy affects resource reallocationAnd thus indirectly firm’s choice for innovation strategy

Impact of Labor Market PolicyImpact of Labor Market Policy

• Based on results from Bartelsman, Perotti, and Scarpetta (2008), Employment Protection Legislation (EPL), reduces productivity in ‘frontier’ industries

• Based on results from Bartelsman, Gautier, and de Wind (forthcoming), EPL reduces share of employment in ‘frontier’ industries

• ‘Frontier’ is a bit tautological: it is a sector where payoff to successful experimentation is highest

relative to follower

It is a sector where the succesful firms are relatively furthest from followers

It is sector with most experimentation

ConclusionsConclusions

Productivity growth has its deep origins in the development of new ideas

Firms make decisions on whether to innovate, to utilize existing technology, or just ‘muddle along’

Firms’ decisions depend on policy environment and market interactions

Policy may impact firm’s decisions directly, but also through selection mechanism