Comparing Growth and Comparing Growth and Labour Productivity - Labour Productivity -

measurement issuesmeasurement issues

OECD Working PaperOECD Working Paper

Presented by Francois Presented by Francois Lequiller (OECD)Lequiller (OECD)

• Forthcoming OECD working paper, mainly Forthcoming OECD working paper, mainly intended for economistsintended for economists

• Question: does differing statistical Question: does differing statistical methodologies significantly affect the methodologies significantly affect the comparability of growth?comparability of growth?

• First message: there remain differences in First message: there remain differences in statistical methodologies between OECD statistical methodologies between OECD countries, and in particular Europe/USA/Japancountries, and in particular Europe/USA/Japan

• Second message: the impact of these Second message: the impact of these differences remains small compared to differences remains small compared to differences in GDP growth during 1995-2001. differences in GDP growth during 1995-2001.

• However, they begin to count when However, they begin to count when differences in GDP per capita growth or differences in GDP per capita growth or productivity growth are themselves small.productivity growth are themselves small.

1. Nominal GDP 1. Nominal GDP measurementmeasurement• There is a unique conceptual framework: There is a unique conceptual framework:

the SNA 93the SNA 93• But countries or regions do not But countries or regions do not

systematically implement all of the SNA, or systematically implement all of the SNA, or interpret it differentlyinterpret it differently

• Three issues are today outstanding: Three issues are today outstanding: – Military equipmentMilitary equipment– FISIMFISIM– SoftwareSoftware

Military equipmentMilitary equipment

• In 1996, the US NIPA introduced government In 1996, the US NIPA introduced government investment=> raised the level of GDP by investment=> raised the level of GDP by around 2% around 2%

• In this move, they came closer to the SNA, but In this move, they came closer to the SNA, but went further by recording weapon systems as went further by recording weapon systems as investment (aircrafts, missiles..) while SNA investment (aircrafts, missiles..) while SNA does notdoes not

• Impact on US GDP growth: -0.06%Impact on US GDP growth: -0.06%

• This difference could disappear in the next This difference could disappear in the next edition of SNAedition of SNA

FISIMFISIM

• FISIM = financial intermediation services FISIM = financial intermediation services indirectly measuredindirectly measured

• Is allocated to users in the US NIPAs, in Is allocated to users in the US NIPAs, in accordance with SNAaccordance with SNA

• Household consumption of FISIM = 2.3% of Household consumption of FISIM = 2.3% of GDP in the USAGDP in the USA

• Not allocated in Europe and in JapanNot allocated in Europe and in Japan

• => GDP is statistically 2.3% higher in the => GDP is statistically 2.3% higher in the USAUSA

FISIM (continued)FISIM (continued)

• Fortunately, this difference has a small impact on Fortunately, this difference has a small impact on growth ratesgrowth rates

• The trend of Household volume FISIM has been in The trend of Household volume FISIM has been in line with GDP trend in the 1990s.line with GDP trend in the 1990s.

• Cumulated over 10 years, the statistical bias is a Cumulated over 10 years, the statistical bias is a mere 0.2%mere 0.2%

• However, in 2000 and 2001, it reached 0,1%However, in 2000 and 2001, it reached 0,1%

• Difference should disappear in 2005Difference should disappear in 2005

• The USA has changed its method in 2003The USA has changed its method in 2003

• Europe and Japan will allocate FISIM in 2005Europe and Japan will allocate FISIM in 2005

SoftwareSoftware

• SNA 93 recommended capitalising SNA 93 recommended capitalising softwaresoftware

• All countries implemented this All countries implemented this recommendation in 1999recommendation in 1999

• But two methods exist: But two methods exist: – ““Demand” : based on what enterprises Demand” : based on what enterprises

record as capital record as capital – ““Supply”: Based on a macro estimate of Supply”: Based on a macro estimate of

“capitalisable software”“capitalisable software”

Software (continued)Software (continued)

• Enterprises are very prudent in Enterprises are very prudent in capitalising softwarecapitalising software

• Software publishing companies do not Software publishing companies do not capitalise at all their softwarecapitalise at all their software

• => Demand method gives low => Demand method gives low software investmentsoftware investment

• => Supply method gives high => Supply method gives high software investmentsoftware investment

Software (continued)Software (continued)

• USA uses a supply method : high investmentUSA uses a supply method : high investment• France, UK, Italy used a demand method : low France, UK, Italy used a demand method : low

investmentinvestment• Japan does not record any own account Japan does not record any own account

investment in softwareinvestment in software• Simulations show that this could have introduced Simulations show that this could have introduced

a statistical bias on differential growth of a statistical bias on differential growth of approximately 0.2%, but only during the period approximately 0.2%, but only during the period 95-2000 (large investment in software, Y2K)95-2000 (large investment in software, Y2K)

• Eurostat/OECD task force has made Eurostat/OECD task force has made recommendations for harmonisation of methodsrecommendations for harmonisation of methods

• Convergence should be reached in a few yearsConvergence should be reached in a few years

2. Volume2. Volume GDP GDP measurementmeasurement

• Three issues are outstanding today Three issues are outstanding today that may have impact on growth that may have impact on growth differentials:differentials:

– The famous “hedonic pricing”issueThe famous “hedonic pricing”issue– Output in servicesOutput in services– The choice of the aggregate index The choice of the aggregate index

numbernumber

Hedonic price indicesHedonic price indices

• Hedonic price indices = better quality adjusted Hedonic price indices = better quality adjusted price indicesprice indices

• Generally lead to more decrease in price Generally lead to more decrease in price indices (or less increase)indices (or less increase)

• Less prices => more volume => more GDP Less prices => more volume => more GDP growthgrowth

• Especially for high tech goods, such as Especially for high tech goods, such as computerscomputers

• Statistical difference => can attain, for Statistical difference => can attain, for computers, 10% per year computers, 10% per year

Hedonic pricing (continued)Hedonic pricing (continued)

• The US is using more and more hedonic pricingThe US is using more and more hedonic pricing• Europe only starts to implement these new Europe only starts to implement these new

statistical methodsstatistical methods• Fortunately, two effects limit the impact on GDP Fortunately, two effects limit the impact on GDP

growth:growth:• 1/ Imports: if computers are imported, there is no 1/ Imports: if computers are imported, there is no

impact on GDP (the difference in investment is impact on GDP (the difference in investment is compensated by the difference on imports)compensated by the difference on imports)

• 2/ Some products (semi-conductors) do not affect 2/ Some products (semi-conductors) do not affect final uses, but only intermediate uses=> GDP is final uses, but only intermediate uses=> GDP is not affected, only distribution between sectorsnot affected, only distribution between sectors

Hedonic pricing (continued)Hedonic pricing (continued)

• Several simulations OECD, INSEE, Bundesbank Several simulations OECD, INSEE, Bundesbank converge in concluding that the overall impact converge in concluding that the overall impact is limited in Europeis limited in Europe

• Upper bound: +0.1% for European countriesUpper bound: +0.1% for European countries

• But asymmetric: +0.25% for the USBut asymmetric: +0.25% for the US

• Future developments: Germany has introduced Future developments: Germany has introduced hedonics methods in 2002hedonics methods in 2002

• Methodological convergence: OECD manual on Methodological convergence: OECD manual on hedonics, Eurostat manual on volume and hedonics, Eurostat manual on volume and pricesprices

ServicesServices

• Service sector = 70 to 80% of GDPService sector = 70 to 80% of GDP

• Some services are hard to measureSome services are hard to measure

• Are they measured consistently Are they measured consistently between countries?between countries?

• Exploratory investigation:Exploratory investigation:– Banking servicesBanking services– Health and social servicesHealth and social services– ““Zero productivity” approachZero productivity” approach

Services (continued)Services (continued)

• Banking services:Banking services:– Large differences in labour productivity (see graph)Large differences in labour productivity (see graph)– But more differences between European countries than But more differences between European countries than

with the US or Japanwith the US or Japan• Health and social services:Health and social services:

– Price indices based on costs: zero productivity Price indices based on costs: zero productivity assumptionassumption

– New volume indices based on outputNew volume indices based on output– Significant differences in labour productivity (see graph)Significant differences in labour productivity (see graph)– Probably due to measurement issuesProbably due to measurement issues– But impossible to concludeBut impossible to conclude

Real value aded per person employed: financial servicesReal value aded per person employed: financial services

80

90

100

110

120

130

140

150

160

1993 1994 1995 1996 1997 1998 1999

USA

France

Germany

Japan

Italy

Real value added per person employed: health and Real value added per person employed: health and social servicessocial services

70

80

90

100

110

120

130

140

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

USA

France

Italy

Japan

USA Health care only

Services (continued)Services (continued)

• zero productivity simulation”zero productivity simulation”– what would happen if certain service industries what would happen if certain service industries

with negative productivity had in fact zero with negative productivity had in fact zero productivityproductivity

– Recent OECD simulation which could give Recent OECD simulation which could give interesting results in differentialinteresting results in differential

– In general the effects are concentrated on In general the effects are concentrated on industries with small final demandindustries with small final demand

– => more impact on distribution of value added => more impact on distribution of value added than on global GDPthan on global GDP

– Impact on US GDP: 0,08%, on France: 0,19%Impact on US GDP: 0,08%, on France: 0,19%– Not evident that the difference (0.1%) is Not evident that the difference (0.1%) is

attributable to statistical biasattributable to statistical bias

Aggregate index numberAggregate index number

• GDP volume growth = price weighted sum of detailed GDP volume growth = price weighted sum of detailed volume growthvolume growth

• Which price structure is to be used, with which formula? Which price structure is to be used, with which formula? • US uses current price structures, with a chained Fisher US uses current price structures, with a chained Fisher

formulaformula• Europe and Japan use either a fixed constant year Europe and Japan use either a fixed constant year

Laspeyres formula, or, for some countries, chained Laspeyres formula, or, for some countries, chained Laspeyres formulaLaspeyres formula

• Chained Fisher gives generally lower volume growth than Chained Fisher gives generally lower volume growth than other formulaeother formulae

• Simulations show that the difference between fixed Simulations show that the difference between fixed Laspeyres and chained Fisher may reach -0.15% for theLaspeyres and chained Fisher may reach -0.15% for the US. US.

Aggregate index number Aggregate index number (continued)(continued)

• If the US was using a fixed Laspeyres, If the US was using a fixed Laspeyres, its growth would have been measured its growth would have been measured higher higher

• This impact neutralises the impact of This impact neutralises the impact of the difference in hedonic pricingthe difference in hedonic pricing

• Statisticans recommend to use hedonics Statisticans recommend to use hedonics combined with chained indices.combined with chained indices.

• European countries are progressively European countries are progressively introducing chained indices.introducing chained indices.

3. Purchasing Power Parities 3. Purchasing Power Parities for Productivity Analysisfor Productivity Analysis

Useful for comparing countries in a Useful for comparing countries in a single time period,single time period,

• But:But:– caution when using for time series caution when using for time series

analysisanalysis– not suitable for industry-level analysisnot suitable for industry-level analysis– limitations for government and capitallimitations for government and capital

Statistical methods: a limited Statistical methods: a limited impact on GDP growth 1995-impact on GDP growth 1995-20002000• Military equipment : -0.06%Military equipment : -0.06%• FISIM < +0.1%FISIM < +0.1%• Software < +0.2%Software < +0.2%• Hedonics +0.1% to 0.25%Hedonics +0.1% to 0.25%• Other services < +0.1%Other services < +0.1%• Index formula < -0.2%Index formula < -0.2%• Compared growth 1995-2000Compared growth 1995-2000• USA: 4.1%USA: 4.1%• Japan:1.4% =>US-Japan = 2.7%Japan:1.4% =>US-Japan = 2.7%• EuropeEurope:2.6% => US-Eurozone = 1.5%:2.6% => US-Eurozone = 1.5%

Labour InputsLabour Inputs

• Three possible measures:Three possible measures:– Persons employed (headcount)Persons employed (headcount)– Full-time equivalentsFull-time equivalents– Hours workedHours worked

• OECD recommends hours worked, OECD recommends hours worked, however needs substantial however needs substantial estimations by OECD (Indirect estimations by OECD (Indirect compilation: average hours worked compilation: average hours worked with NA headcounts).with NA headcounts).

Labour InputLabour Input

• OECD recommends use of national OECD recommends use of national accounts employment data for accounts employment data for consistency with GDP. consistency with GDP.

• However National accounts However National accounts employment not well reported by employment not well reported by countriescountries

• Recommended quality adjustment Recommended quality adjustment but not implemented in practicebut not implemented in practice

ProductivityProductivity

• Substantial comparability difficulties Substantial comparability difficulties remain with the denominator: labor input.remain with the denominator: labor input.

• Employment data in the national accounts Employment data in the national accounts needs to be better transmitted and needs to be better transmitted and controlledcontrolled

• Direct data on hours worked is essentialDirect data on hours worked is essential

• First « more comparable » productivity First « more comparable » productivity data shortly in the OECD « productivity data shortly in the OECD « productivity database ».database ».