productivity issues: past, present & future - piie · productivity issues: past, present &...

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


Future Issues: Intangible capital & management


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


Future Issues: Intangible capital


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

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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

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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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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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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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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

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