presented at the NERO meeting “Policy challenges in the global economy: productivity, risk and growth“

The slowdown of German

productivity growth

Steffen Elstner, Lars P. Feld and Christoph M. Schmidt

19th June 2017, Paris

1. Motivation

2. The effects of German labor market reforms on productivity

3. An end to outsourcing in German manufacturing

4. Digitization and productivity

5. Conclusion

Outline

Short summary of main results

1. dampening „composition effect“ of successful labor market reforms at the beginning of the 2000s

2. strong slowdown productivity growth manufacturing outsourcing process seemingly over

change in employment practices

3. digitisation: no productivity enhancing impulses from the ICT-intensive sectors

1. Motivation

Since the mid-2000s: weak labor productivity growth in almost all industrial countries

Labor productivity per hours worked in selected countries

1 – Change in real GDPper hours worked to the previous year. HP-filter, 100. 2 – Until 1990 the former West Germany. 3 – DE-Ger- =

many, FR-France, yIT-Ital , .ES-Spain, UK-United Kingdom, JP-Japan, US-United States Nominal GDPper hours worked (for Japan 2013) in

purchasing power parities. 4 – Average annual change. 5 – For Japan . 6 – Percentage points.2013

1995 2005

Source: European CommissionSVR-15-110

0

20

40

60

80

100

120

140

DE FR IT ES UK JP US

Level differences3

2014

-1

1

2

3

4

5

6

0

1971 76 81 86 91 96 01 06 11

%

Trend growth1

Germany2 France Italy Spain

United Kingdom Japan United States

EU-15 = 100

-4 -3 -2 -1 1 2 3 40

%

Gross domestic product6 Decline in hours6

Change 2005 against 19954

Real labor productivity

Germany

France

Italy

Spain

United Kingdom

United States

Japan

-4 -3 -2 -1 1 2 3 40

%

Change 2014 against 20054,5

2014

• no productivity growth in Italy; „ICT revolution“ in the U.S.; recovery in productivity growth in Spain

Importance of labor productivity growth Indicators of macroeconomic development1

1 – Until 1990 former territory of the Federal Repubilc of Germany. 2 – Difference between actual growth rate of output and potencial outputgrowth. 3 – Numbers until 1990 optional by backward chaining. 5 – Unemployed people as a share of the activeForecast by the GCEE. 4 –working population.

%

Change in GDP

potential output growth(hours worked)

business cycle component2 potential output growth

© 284Sachverständigenrat | 16-

million people

employed persons4

%

unemployment rate5

(rigth Scale)

32

34

36

38

40

42

44

46

1970 76 82 88 94 00 06 120

2

4

6

8

10

12

14

Labor market

-8

-6

-4

-2

2

4

6

8

0

1970 76 82 88 94 00 06 12

actual growth rate Forecast period3

2017 2017

Forecast period3

potential output growth(labor productivity)

Sources: Federal Statistical Office of Germany, own calculations

• in last decades GDP growth primarily driven by productivity growth

• since the year 2005 the picture has changed

Differences between manufacturing and service sectors (results obtained with HP-filter (100))

Trend labour productivity growth1

1 – Percentage change of labour productivity (hourly concept) compared to the previous year, HP filter, =10 2 For further details see 0. –Annual Report 2014 Box 10. 3 – Real gross capital stock divided by hours worked. The following steps are done to derive the growth contri-bution of capital intensity: First the potential growth rate of capital intensity is determined with the HPfilter. Second, this potential growth rateis weighted by one minus the labour income share. To calculate the labour income share the compensation of all employees, adjusted by theincome of self-employed people, is divided by gross value added. Third, to compute the relative weights of the growth contributions of thegross capital stock of buildings and equipment, respectively, the nominal fractions of the gross capital stock of the previous year are used.

Growth contributions of the economic sectorsto trend labour productivity growth

Percentage points

Growth contributions of the components totrend labour productivity growth

Percentage points

0.5

1.0

1.5

2.0

2.5

0

1992 95 98 01 04 07 10 13

Labour productivity (%)

Total factor productivity2 Capital intensity buildings3

Capital intensity equipment and other products3

Growth contributions of the components totrend productivity growth in service sectors

Growth contributions of the components totrend productivity growth in manufacturing

2015

Sources: Federal Statistical Office, own calculations© 58Sachverständigenrat | 16-3

0.5

1.0

1.5

2.0

2.5

0

1992 95 98 01 04 07 10 13

Labour productivity (%)

Manufacturing Service sectors

Other economic sectors

2015

Percentage points

-0.5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

1992 95 98 01 04 07 10 13

Labour productivity (%)Total factor productivity2 Capital intensity buildings3 Capital intensity equipment andother products3

2015

Percentage points

-0.5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

1992 95 98 01 04 07 10 132015

• manufacturing: high TFP growth, low investment

• service sectors: low TFP growth, robust investment

2. The effects of German labor market reforms on productivity

Key terms and relationships

• labor productivity: highly complex variable with a large number of influencing factors

∆𝑙𝑛𝑦𝑡 = 𝛼∆𝑙𝑛𝑘𝑡 + 1 − 𝛼 ∆𝑙𝑛𝐸𝑡 + ∆𝑙𝑛𝐴𝑡

𝑘𝑡: capital deepening/ capital services per hour/person

𝐸𝑡: average labor quality per hour/person

𝐴𝑡: total factor productivity (innovation activity)

• not mentioned: outsourcing, dismissing productivity, intensity of competition and so on

Definition composition effect

• increase in employment by roughly 4.3 million persons between the years 2005 and 2016 (total 43.5 million people in 2016)

successful integration of less-qualified workers into the labor market

decline in average productivity per employed person (composition effect, effect on average labor quality)

• side effect of successful reforms

Effect becomes visible by the following developments:

1. structural shift towards specific service sectors (reallocation effect)

2. sector-specific effects within these sectors

Strong increases in employment: trade, accommodation, health services and personnel leasing

Employment development and labor productivity for selected economic sectors1

Increase in employment Employment development and level of laborproductivity

1,000 persons1,000 persons

Within sector-specific effects

Reallocationeffect

Change against1995 (%)

-500

500

1,000

1,500

2,000

2,500

3,000

3,500

0

2005 06 07 08 09 10 11 12 13 2014

Labor productivity Accumulated growth contributions to laborproductivity since 1995

Percentage points1995 = 100

50

75

125

150

175

200

225

250

100

1995 97 99 01 03 05 07 09 11 13

All economic sectors

Manufacturing– VG

-1,000

-750

-500

-250

250

500

750

1,000

0

-80

-60

-40

-20

20

40

60

80

0

GuS HVGg SUdl FrUdl VG IuK FuV

Economic sectorTrade, transportation,accommodation – HVGg

Information andcommunication – IuK

Financial and insuranceactivities – FuV

Professional, scientific andtechnical activities – FrUdl

Difference (in percent) to the average level of laborproductivity in the year 2005 (right hand scale)

Absolute change in employment between the years2005 and 2014

1995 97 99 01 03 05 07 09 11 13

-3

3

6

9

12

15

18

21

0

VG HVGg IuK FuV FrUdl

SUdl All economic sectors

Administrative and supportservice activities – SUdl

GuS

20142014

%

below averageproductive

above averageproductive

Human health and socialwork activities – GuS

SVR-15-2111 – Real gross value added per person employed.

Decomposition of labor productivity

decompose aggregate labor productivity growth into:

1. within sector specific effects (1. term, right side)

2. reallocation effect (2. term, right side)

𝐴𝑃𝑡 − 𝐴𝑃0𝐴𝑃0

= 𝐴𝑃𝑡𝑖 − 𝐴𝑃0

𝑖

𝐴𝑃0𝑛0𝑖

𝑁

𝑖=1

+ 𝑛𝑡𝑖 − 𝑛0

𝑖𝐴𝑃𝑡𝑖

𝐴𝑃0

𝑁

𝑖=1

Since the early 2000s the growth contribution of the reallocation effect on labor productivity was negative

Employment development and labor productivity for selected economic sectors1

Increase in employment Employment development and level of laborproductivity

1,000 persons1,000 persons

Within sector-specific effects

Reallocationeffect

Change against1995 (%)

-500

500

1,000

1,500

2,000

2,500

3,000

3,500

0

2005 06 07 08 09 10 11 12 13 2014

Labor productivity Accumulated growth contributions to laborproductivity since 1995

Percentage points1995 = 100

50

75

125

150

175

200

225

250

100

1995 97 99 01 03 05 07 09 11 13

All economic sectors

Manufacturing– VG

-1,000

-750

-500

-250

250

500

750

1,000

0

-80

-60

-40

-20

20

40

60

80

0

GuS HVGg SUdl FrUdl VG IuK FuV

Economic sectorTrade, transportation,accommodation – HVGg

Information andcommunication – IuK

Financial and insuranceactivities – FuV

Professional, scientific andtechnical activities – FrUdl

Difference (in percent) to the average level of laborproductivity in the year 2005 (right hand scale)

Absolute change in employment between the years2005 and 2014

1995 97 99 01 03 05 07 09 11 13

-3

3

6

9

12

15

18

21

0

VG HVGg IuK FuV FrUdl

SUdl All economic sectors

Administrative and supportservice activities – SUdl

GuS

20142014

%

below averageproductive

above averageproductive

Human health and socialwork activities – GuS

SVR-15-2111 – Real gross value added per person employed.

Growth contributions to aggregate labor productivityPercentage points

Share1

% 1995 – 2005 2005 – 2014 1995 – 2005 2005 – 2014

Within sector-specific growth contributions

Manufacturing 22.4 0.7 0.3 0.8 0.4

Service sector 69.8 0.2 0.3 0.8 0.6

including:

Whosesale and retail trade, repair of motor 16.5 0.3 0.0 0.5 0.1

vehicles, transport and storage, accommodation

Information and communication 4.6 0.2 0.3 0.2 0.3

Professional, scientific and technical 6.3 – 0.2 – 0.1 – 0.1 – 0.1 activities

Administrative and support service activites 4.3 – 0.1 – 0.1 – 0.0 – 0.0

Human health and social work activities 6.6 0.0 0.1 0.1 0.1

Reallocation effect 0.1 – 0.2 0.2 – 0.2

Development of labor productivity (%)

Actual development2

1.1 0.4 1.9 0.8

Development without structural shifts3

0.9 0.7 1.6 1.0

1 – Share of the corresponding sector in total gross value added in the year 2005. 2 – Average annual change of total gross value added per

person employed and per hour, respectively. 3 – Without the reallocation effect. Difference in total due to rounding.

SVR-15-212

Per person employed Per hour

3. Slowdown in productivity growth in German manufacturing - An end

to outsourcing?

• adjustment of total hours worked played an important role

Growth contributions: labor productivity in manufacturing sector (output per hour)

1 – Average annual change. 2 – Manufacture of computers, electronic and optical products and electrical equipment. 3 – Percentagepoints. 4 – Including military weapon systems. 5 – Including research and development, software and databases, copyright, mineralexploration and cultivated assets.

Growth contributions to labor productivity and capital stock in the manufacturing sector1

-2 -1 1 2 3 4 5 60

%

Decline in hours3Gross value added3

Change 2005 against 1995

Labor productivity

SVR-15-311

Manufacturing

-Chemicalproducts

-Metal production andmetal products

-Electrical engineering2

-Machinery

-Vehicle production

-2 -1 1 2 3 4 5 60

%

Change 2013 against 2005

-2,0 -1,5 -1,0 -0,5 0,5 1,0 1,5 2,0 2,5 3,0 3,50

%

Machinery and equipment3,4 Construction3

Change 2005 against 1995

Total

Manufacturing

-Chemicalproducts

-Metal production andmetal products

-Electrical engineering2

-Machinery

-Vehicle production

Change 2013 against 2005

-2,0 -1,5 -1,0 -0,5 0,5 1,0 1,5 2,0 2,5 3,0 3,50

%

Labor productivity (output per hour)

Capital stock (gross stock of fixed assets)

Other products3,5

Growth contributions to labour productivity in selected sectors of manufacturingPercentage points

Share1

% 1995 – 2005 2005 – 2013 1995 – 2005 2005 – 2013

Within sector-specific growth contributions

Manufacturing 2.7 1.1 3.1 1.8

including:

Vehicle production 17.1 0.2 0.7 0.2 0.9

Machinery 14.7 0.2 – 0.2 0.3 – 0.2

Electrical equipment 7.1 0.1 0.0 0.1 0.0

Computer, electronic and optical products 6.6 0.9 0.4 1.0 0.7

Metal production and metal products 13.1 0.2 0.1 0.3 0.1

Chemical products 7.6 0.4 – 0.0 0.5 – 0.0

Reallocation effect – 0.1 0.1 – 0.0 0.0

Actual development %2

2.7 1.3 3.1 1.6

1 – Share of the corresponding sector in total gross value added of manufacturing in the year 2005. 2 – Average annual change of real

gross value added per person employed and per hour worked, respectively.

SVR-15-312

Per person employed Per hour

Depth of production (vertical integration) does not decline anymore

Important: Relocation abroad

4. Digitization and productivity

Growth Accounting

• update of the analysis done by Eicher und Röhn (2007)

• use of the ifo Investment Database

• at the industry level (industry i):

∆ ln 𝑦𝑖=ν𝑖𝐼𝐶𝑇∆ ln 𝑘𝑖

𝐼𝐶𝑇 + ν𝑖𝑁𝐼𝐶𝑇∆ ln 𝑘𝑖

𝑁𝐼𝐶𝑇 + ν𝑖𝐿∆ ln𝐸𝑖 + ∆ ln𝐴𝑖

• consideration of the following groups:

1. ICT-producing sectors (roughly 5% of total value added)

2. ICT-intensive sectors (roughly 40% of total value added)

3. other sectors (roughly 55% of total value added)

ICT productivity paradox in service sectors

Paradox: no clear positive link between ICT-investment and “genuine“ productivity gains in ICT-intensive sectors

Comparison of the contributions to labor productivity and total factor productivity between Germany andthe United States1

-0.5

0.5

1.0

1.5

2.0

2.5

3.0

0

ICTcapital intensity Total factor productivity

1991

1995

-0.5

0.5

1.0

1.5

2.0

2.5

3.0

0

ICTproducing sectors ICT intensive manufacturing

Labor productivity2 Total factor productivity

Non-ICTcapital intensity Labor6 Other ICTintensive sectors

Percentage points3 Percentage points3

Other sectors

95

00

00

05

05

10

10

13

91

95

95

00

00

05

05

10

2010

2013

1991

1995

95

00

00

05

05

10

10

13

91

95

95

00

00

05

05

10

2010

2013

Germany4 United States5 Germany4 United States5

SVR-15-315

1 – Data for United States: own calculations. 2 – Labor productivity per hours worked. 3 – Average annual growth contributions. 4 – Calcu-lations based on the updated study of Eicher and Röhn (2007). 5 – Own calculations based on data for private economy transferred to totaleconomy. 6 – Labor quality and reallocation of hours worked.

Sources: BEA, ifo

Paradox: Difference to the US

• paradox only exists in service sectors

• Bloom, Sadu und van Reenen (AER, 2012):

complementary factors (e.g. firm structure and - organisation)

regulation factor- and product markets (competition)

human capital

firms are not successful in implementing ICT-investments efficiently (e.g. due to demographic change)

quality of management (remuneration systems, promotions, “hire and fire“)

• demographic change

5. Conclusion

Summary

1. dampening „composition effect“ of successful labor market reforms at the beginning of the 2000s

2. manufacturing: outsourcing process seemingly over

3. no productivity enhancing impulses from the ICT-intensive sectors

4. important role for education and training, teaching of necessary IT-skills

5. against a too strong regulation of labor and goods markets, in particular, in several service sectors

Thank you for listening!

6. Appendix

Investment Research and Development

• 64 % of total R&D investment is done by manufacturing, weaker development of R&D in small and medium businesses

Major challenge: demographic change

• laborforce will decline in future; in particular, in innovative professions

• acceptance of new business models will tend to decline in an ageing society (technology diffusion)

Demographic change and potential for innovation

30

35

40

45

50

55

01950 60 70 80 90 00 10 20 30 40 50 2060

SVR-15-205

1 – Unemployment rate is calculated as officially registered unemployment divided by the sum of employment subject to social security contri-butions and officially registered unemployment. Since 2005, data for unemployment are incomplete as local municipalities attend to2 –some unemployed persons who receive the basic support for job-seekers according to the Second Book of the Code of Social Law (SGB II).3 – Due to changes in the job classification, data from 2012 onwards are not fully comparable to previous years. 4 – 1950 to 1989: formerFederal Republic of Germany and German Democratic Republic combined, since 1990: Germany. As of 2011, calculations are based on thepreliminary results of the population projection based on the Census 2011. As of 2014: results of the 13th coordinated population projectionfor Germany, variant 2: continuity with higher migration (long-run net migration of 200 000 persons per year).

Men Women

0

2

4

6

8

10

12

14

16

18

2000 02 04 06 08 10 12 2014

Engineers3

Median age in Germany4Unemployment by occupational groups1,2

TotalChemists, physicists,mathematicians3

%

Sources: IAB, Statistisches Bundesamt, VDI

Industry 4.0

• digitization and networking of the value added chains in manufacturing with ICT

• increase in total factor productivity:

elimination of rising returns to scale; declining set up costs for special productions

new product innovations induced by better data

provision of new services by producer

• professions, workplaces and products come under pressure (industrial revolution)

• no clear link between labor productivity growth and the change of the capital stock

• important role for research and development

Growth contributions: capital stock