Productivity Issues: Past, Present & Future
John Van Reenen (LSE)
Peterson Institute, November 2015
Managers: Main Inhibiters & Drivers of Productivity?!
MOTIVATING QUESTIONS
• Why has productivity growth been disappointing in recent years?
• What can be done?
• What are some of the big future issues in thinking about productivity?
Specific & General Causes of low productivity
Future Issues: Intangible capital & management
Productivity Puzzle in UK
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UK Productivity (GDP per hour) 14% below pre-crisis trend relative to trend; 1979-2015
Source: Whole Economy GDP per hour worked, seasonally adjusted. ONS Statistical bulletin, Labour Productivity, Q12015, downloaded 8 September 2015. (Q2 2010=100)
Note: predicted value after Q2 2008 is the dashed line calculated assuming a historical average growth rate of 2.2%.
PRODUCTIVITY GROWTH SLOWS EVERYWHERE, BUT UK PARTICULARLY BAD
Specific & General Causes of low productivity
Future Issues: Intangible capital & management
Productivity Puzzle in UK
UK-SPECIFIC PRODUCTIVITY PUZZLE
• Huge shock: Slowest recovery of GDP in a Century• Accelerated fiscal austerity (unlike US). Continuing
through at least 2020– e.g. ~40% cuts in public investment 2010-12
• UK Labor market reaction critical– Real wages fell by about 10% 2008-2014 – Different from earlier recessions: welfare system
more effective & unions weaker– Meant unemployment did not rise as much as US &
participation rates held up • Cheap labor & credit crunch hangover means labor-
capital substitution, depressing investment
MEDIAN REAL WAGES FELL BY ~10% SINCE 2008
Notes: Annual Survey of Hours and Earnings (ASHE) weekly earnings numbers, updated from Gregg et al (2014a, 2014b), deflated by CPI and CPIH (from 2005).
UK EMPLOYMENT RATE AT RECORD HIGH
Source: ONS LFS (2015, March) http://www.ons.gov.uk/ons/dcp171778_396467.pdf
Source: Oulton and Wallis (2015) http://cep.lse.ac.uk/pubs/download/dp1342.pdf
GLOBAL LESSONS
• Demand– Initial shock, but unlikely to be so persistent? But:– Ongoing Eurozone crisis (~50% of UK exports)– Tough austerity (through at least 2020)– Hysterisis effects, e.g. capital scrapping (Delong &
Summers)
• Supply– Banking Sector: bad debts not fixed as quickly as US.
e.g. RBS still in public hands (UK big financial sector)– Technology. I find idea of technological slowdown
unconvincing
Specific & General Causes of low productivity
Future Issues: Intangible capital
Productivity Puzzle in UK
INCREASING IMPORTANCE OF INTANGIBLES
• Corrado, Hulten & Sichel (2007) - will cause mismeasurement of TFP growth (direction is ambiguous, but could be part of slowdown)
• Two types of intangible capital:
1. Technological Innovation – ICT, R&D, IP
2. “Economic Competencies”– Evidence of importance of management practices for
productivity across firms & countries– Bloom & Van Reenen (2007) World Management
Survey (WMS)
World Management Survey (12,342 firms, 4 major waves: 2004, 2006, 2009, 2014; 34 countries)
Medium sized manufacturing firms(50-5,000 workers, median≈250) Now extended to Hospitals, Retail, Schools, etc.
Average Management Scores by Country
Note: Unweighted average management scores (raw data) with number of observations. All waves pooled(2004-2014); Source: Bloom, Sadun & Van Reenen (2015)
0.5
11.
52
0.5
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1 2 3 4 5
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
1 United States 2 Japan 3 Germany 4 Sweden 5 Canada 6 Great Britain
7 France 8 Australia 9 Italy 10 Mexico 11 Poland 12 Singapore
13 New Zealand 14 Northern Ireland 15 Portugal 16 Republic of Ireland 17 Chile 18 Spain
19 Greece 20 China 21 Turkey 22 Argentina 23 Brazil 24 Vietnam
25 India 26 Colombia 27 Kenya 28 Nigeria 29 Nicaragua 30 Myanmar
31 Zambia 32 Tanzania 33 Ghana 34 Ethiopia 35 Mozambique
Den
sity
Firm Average Management ScoreGraphs by country_rank
Notes: Firms with 50 to 5000 employees randomly surveyed from country population.
Large variation of firm management within countries
Firm TFP strongly increasing in management
Management is an average of all 18 questions (set to sd=1). TFP residuals of sales on capital, labor, skills controls plus a full set of SIC-3 industry, country and year dummies controls. N=8314
-1-.5
0.5
1TF
P
1 2 3 4 5Management
Country Total Factor Productivity (TFP) relative to US
Source: Bloom, Sadun & Van Reenen (2015)
Notes: TFP gaps from Penn World Tables; fraction accounted for by management uses the weighted average management scores and an assumed 10% impact of management on TFP
Management accounts for ~30% of TFP Gap with US
Source: Bloom, Sadun & Van Reenen (2015)
Notes: TFP gaps from Penn World Tables; fraction accounted for by management uses the weighted average management scores and an assumed 10% impact of management on TFP
MANAGEMENT & PRODUCTIVITY GROWTH
• EU did not enjoy the 1995-2003 acceleration in US productivity growth
• Weaker product & labor market competition so less flexible management means slower to pick up on technological opportunities from ICT
• Bloom, Sadun & Van Reenen (2012) estimate 50% of slower EU performance was management related
EUROPEAN CATCH-UP WITH US REVERSED IN MID 1990S
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1980 1985 1990 1995 2000 2005year
US
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US EU JAPAN
Average Labour Productivity (GDP per worker) Growth before and after the Global Financial Crisis
Source: Conference Board (2014), TED Table 9 derivedhttps://www.conference-board.org/retrievefile.cfm?filename=SummaryTables_Jan20141.pdf&type=subsite
Pre-crisis 1997-2007
Post-crisis 2007-2014
Pre-crisis
Post-crisis Post-crisis
Pre-crisis
MANAGEMENT & PRODUCTIVITY GROWTH
• Weaker product & labor market competition so less flexible management means slower to pick up on technological opportunities from ICT
• Bloom, Sadun & Van Reenen (2012) estimate 50% of slower EU performance was management related
CONCLUSIONS
• Slowing productivity growth post crisis has hit some countries (e.g. UK) more than others – Labor market flexibility helped – Unsupportive fiscal policy in face of enormous
negative shock– But puzzle deepens if it persists
• One key issue for understanding productivity is intangibles– “hard technologies” – “soft technologies” (e.g. management)– Why patterns of diffusion of intangible differ so much
across countries & firms?
FURTHER READING
• CEP Election Analysis Series http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEPEA
• World Management Survey http://worldmanagementsurvey.org/
• LSE Growth Commission Final Reporthttp://www.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/GCReportSummary.pdf
Europe about 30% lower income (GDP per head) than US
Source: Conference Board (2014), TED Table 8 derived, EU-15https://www.conference-board.org/retrievefile.cfm?filename=SummaryTables_Jan20141.pdf&type=subsite
30% GAP
It isn’t just less jobs and more holidays. EU productivity 22% lower than US
Source: Conference Board (2014), TED Table 8 derived, EU-15https://www.conference-board.org/retrievefile.cfm?filename=SummaryTables_Jan20141.pdf&type=subsite
22% GAP30% GAP
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US EU JAPAN
Average Labour Productivity (GDP per worker) Growth before and after the Global Financial Crisis
Source: Conference Board (2014), TED Table 9 derivedhttps://www.conference-board.org/retrievefile.cfm?filename=SummaryTables_Jan20141.pdf&type=subsite
Pre-crisis 1997-2007
Post-crisis 2007-2014
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US EU JAPAN
Average Labour Productivity (GDP per worker) Growth before and after the Global Financial Crisis
Source: Conference Board (2014), TED Table 9 derivedhttps://www.conference-board.org/retrievefile.cfm?filename=SummaryTables_Jan20141.pdf&type=subsite
Pre-crisis 1997-2007
Post-crisis 2007-2014
Pre-crisis
Post-crisis
Source: Bloom, Sadun and Van Reenen (2015) “Management as a Technology”
2 2.5 3 3.5Management Score
United StatesSweden
JapanGermany
CanadaGreat Britain
ItalyAustralia
SingaporePolandMexicoFranceTurkeyChina
PortugalNew Zealand
ChileBrazilSpain
ColombiaGreece
IndiaArgentina
KenyaMyanmar
NigeriaNicaragua
EthiopiaTanzania
ZambiaGhana
Mozambique Domestic Firms
Foreign Multinationals
Foreign Multinationals appear to transplant management overseas
THE GROWTH PROBLEM UK GDP PER CAPITA, 1955-2015
Notes: Trend line at 0.57% per quarter (linear trend from 1955Q1 to 2008Q1 when recession began). Quarterly GDP (in £1000) per head (ONS series IHXW), market prices (downloaded April 28th 2015)http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=IHXW&dataset=ukea&table-id=X11. 2015Q1 estimated using GDP growth http://www.ons.gov.uk/ons/dcp171778_402219.pdf
17%Gap
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2005q12010q1
2015q1
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GDP per head Pre-crisis GDP per head trend
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THINGS PICKING UP IN 2015Q2 – TREND OR BLIP?
Weighted Mng. Gap with US TFP Gap With US % TFP due to ManagementUS 0 1Japan -.3 .71 8.82Sweden -.39 .92 48.46Germany -.46 .83 24.46Canada -.59 .88 45.55Britain -.71 .85 48.5Mexico -.74 .73 23.04Australia -.86 .83 45.24Italy -.92 .82 45.4Portugal -.95 .66 23.04Poland -.98 .8 44.74France -1.02 .84 58.87Colombia -1.03 .52 15.69NZ -1.05 .79 43.54Chile -1.05 .69 28.4Spain -1.05 .77 39.41Brazil -1.09 .45 13.75China -1.16 .41 12.89India -1.19 .48 16.38Kenya -1.26 .25 9.04Argentina -1.34 .69 35.64Tanzania -1.43 .26 10.69Greece -1.64 .71 47.28Zambia -1.84 .05 6.06Ghana -1.93 .14 9.64Mzmbique -2.33 .33 21.13Average 29.03
Management accounts for ~30% of TFP Gap with US
PRODUCTIVITY IN LEVELS: THE GAP
Source: ONS International Comparisons of Productivity, First Estimates, 2013 Notes: Current price GDP per hour worked from ONS data. Average refers to G7 average, excluding UK