Реферат: Labour productivity



















Theanalysis in this paper dismisses the notion of a genuine trade-off between employmentand productivity growth. Obviously, misguided policies to exploit such a trade-offhave to be avoided. However, there are no reasons to think that structural labourmarket reforms boosting employment will typically entail negative implicationsfor longer-term productivity growth. The dynamic response of productivity to positivelabour supply and wage shocks may entail a temporary reduction in productivitygrowth rates, which, in principle could be considered as benign; anyway, the sizeof a negative effect of this type is estimated to be fairly small. In particular,this paper reaches the following conclusions: (i) The increase in employment sincethe mid 90s has indeed been to a significant extent the result of such positivelabour market shocks, with about one half of the additional jobs attributed tostructural improvements; (ii) Positive employment shocks can only account for avery small fraction of the observed productivity slowdown; consequently, the declineof labour productivity growth must be considered as predominantly caused by otherfactors and probably not just a temporary phenomenon.


Theso-called Lisbon strategy involves efforts on several fronts both to improve labourmarket performance and to raise productivity growth in the EU. This twin aspirationis neatly summed up in the phrase ‘more and better jobs’, which implies higher employmentrates but also more productive, higher-quality employment.

Thestrategy sets explicit targets for ‘more jobs’: an employment rate of as close aspossible to 70% and a female employment rate of over 60% by 2010. The Stockholmsummit a year later added a further target of an employment rate of 50% for olderworking-age people. Given the rate of employment growth required to meet thesetargets, the Lisbon conclusions also established an implicit target for productivitygrowth with the statement that – if the recommended measures were implemented againsta sound macroeconomic background – it should be possible to achieve 3% GDP growth.

Thesetargets have met with criticism in some quarters on several counts. Some regardedthem as over-ambitious, particularly since the European Council (as opposed to individualMember States) lacks full control of the necessary instruments to meet its objectives.There were doubts about whether a credible strategy had been set out, or evenwhether EU leaders realised the extent of the reforms that would be required. Otherspointed to the risk of policy distortions – there are many ways to raise employmentrates, for example, but not all of them are fully consistent with raising economicwelfare. On the other hand, the Lisbon targets appeared to score an initial publicrelations success, being widely interpreted as a signal that the EU was taking economicreform seriously. (Even then, however, it was noted that this might damage thecredibility of similar exercises were the targets to be missed by a wide margin.)

Twoclear advantages of the Lisbon strategy, and especially the employment rate targets,are often overlooked in these discussions. First, the commitment to raising employmentrates (i.e. raising labour force participation as well as reducing unemployment)represents a clear rejection of an idea that has been one of the great weaknessesof European employment policy in recent decades, namely that high unemploymentcan be cured by discouraging labour supply. If this seems obvious today, it isnot so long ago in some countries that married women were discouraged from working,while older workers were actively encouraged to quit the labour market through earlyretirement schemes, partly in response to high unemployment. Even more recently,governments in some EU Member States were entertaining a similar notion – that employmentin persons might be boosted by means of regulatory restrictions on hours worked.

Secondly,the Lisbon strategy embodies the idea that structural improvements in the functioningof markets are required for a sustained increase in employment rates and higherproductivity growth. Clearly, at any given moment, output and (un-)employment aredetermined by real demand in the economy. However, over the longer term, real demandwill generally tend towards a level consistent with stable inflation, this levelbeing determined by overall supply conditions in the economy. By focusing on thefunctioning of labour, product and capital markets, as well as investments inR&D and human capital, the Lisbon strategy seeks to raise employment and growthpotential in a sustainable manner.

Inaddition, while one may ask whether the employment rate is the ideal variable totarget, there is no doubt that low employment rates in several EU Member Statesare a symptom of poor labour market performance, and that improving labour marketperformance would lead both to higher employment rates and to greater economicwelfare. The benefits of higher employment rates for the sustainability of the publicfinances (at least in the short-to-medium term) were also noted.

Againstthis background, this paper focuses on a crucial question for the strategy of‘more and better jobs’: whether and in what sense there are trade-offs between employmentgrowth and productivity growth. Concern has been raised in some quarters that raisingthe employment rate in the EU will result in lower productivity growth. Indeed,there is a grain of truth in this: a rising employment rate implies that productivitygrowth will be temporarily below full potential, simply because the number of workersper unit of capital is increasing. In addition, those who move from unemploymentor inactivity into employment are likely, on average, to have a relatively lowlevel of productivity, at least at first.

However,there are three reasons why this is not a cause for concern. First, the temporarynegative effect on productivity growth is estimated to be rather small. Secondly,even if growth in productivity – GDP per employed person – is negatively affected,a higher employment rate unambiguously raises growth in GDP per capita in theshort term. Newly employed people clearly contribute more to GDP than they usedto, even if their productivity is below average. Thirdly, there are few reasonsto think that a higher employment rate has any negative implications for longer-termproductivity growth, which is what really matters for the competitiveness and dynamismof the EU economy. These points –important ones for the Lisbon strategy – are supportedby two separate pieces of analysis: an econometric analysis of the dynamic responseof productivity to structural employment shocks, and a simulation based on theCommission’s macroeconomic model. Thus, there is no genuine trade-off – in thesense of prioritising one of the two – between policies to raise the employmentrate and policies to foster productivity growth.

2. More and better jobs – anexample of goal inconsistency?


2.1 Background considerations

Atthe moment, EU GDP per capita in purchasing power parities is around 70% of theUS level, with 1/3 of the gap due to productivity differentials and 2/3 due to alower labour input (i.e. a lower employment rate and hours worked compared withthe US). Consequently, improving the EU’s productivity performance and raising employmentis fundamental to increasing the long-term growth potential of the EU economy[1].However, several observers have argued that the twin goals of raising both employmentrates and productivity growth may be difficult, or even impossible to pursue simultaneously,given a perceived negative trade-off between employment and productivity.

Thebasic argument for the existence of a negative relationship between employment andproductivity is derived from straightforward comparative-static reasoning. For anystandard production function, average factor productivity will decrease with risingoutput as the expansion of production will require the bringing in of less andless productive factors into operation – less fertile soil, older and less efficientequipment and machinery, workers with lower abilities and skills, etc. Then, obviously,higher employment will inevitably be associated with lower output per worker andvice versa. Thus, in such a comparative-static setting it is easy to construe asituation where, for example, regulations and restrictions excluding low productivityworkers from employment result in a higher level of actual labour productivity,but it will come at the price of lower employment; similarly, reform efforts toprice back low productivity workers into employment will mean more jobs, but thiswill be associated with lower overall productivity.

Incomparing labour productivity levels across countries, such considerations of acomparative-static nature can be useful. There appears to be widespread agreementthat measured labour productivity in Europe relative to the US may be upwardlybiased as a result of the exclusion of more low productivity workers. Indeed,the EU employment rate falls short of the US level by some 10 percentage points,with lower participation rates and higher unemployment rates disproportionatelyaffecting low skill workers. In a similar vein, the capital-labour ratio appearsto be typically higher in the EU than in the US, driving up measured labour productivityin Europe. Thus, both economic theory and a quick inspection of a few aggregatefigures suggest that one should control for these effects in productivity comparisons.Obviously, in consequence, a Europe at full employment may well see a significantlylarger labour productivity gap vis-à-vis the US than the current actualfigures suggest.

Byhow much could the productivity gap rise? A simple calculation could be performedfocussing on comparisons of total factor productivity levels, using the followingrelationship:

(1)Y/L= (K/L)1-α. TFP

whereY/L denotes measured labour productivity, TFP is total factor productivity, K/Lis the capital intensity of production and 1-α is the capital-elasticity ofoutput in the constant-returns Cobb-Douglas case. For the calculation, GDP and thecapital stock in PPP are taken from AMECO. Employment is civilian employment(LFS). Hours worked come from the GGDC (Groningen Growth and Development Centre).The results of this simple exercise suggest that the productivity gap betweenthe euro area and the US, shown in the graph below, may be some 6 percentage pointswider than the actual figures indicate.

Graph1: TFP and labour productivity gap



Source: Commission services

However,the notion of a negative relationship between employment and productivity levelsemerging in comparative-static considerations should not be confused with a genuinetrade-off between employment and productivity in a long-run dynamic sense. One ofthe “big” stylised facts in economics is that in the long run technical progressis neutral with respect to employment. History has told us that the process ofcapital accumulation and technological innovation has not meant the “end of work”and despite notions of “factories without workers”, it is clear that from an overallperspective workers have not been replaced by machines. In standard economic growththeory this long-run neutrality proposition has been captured by the concept oflabour-augmenting technical progress[2]. Along this balanced growthpath, labour productivity, real wages and the capital intensity of productiongrow at the same rate, driven by (exogenous) technical progress. Technical progressis called total factor productivity growth, indicating that this concept shouldnot be seen in a narrow “engineering” sense. Given that TFP determines our standardsof living in the long run, clearly policy makers want it to grow faster than inrecent years.

Actuallabour productivity growth can of course deviate from the balanced labour productivitygrowth rate over the short-to-medium term due to capital-labour substitution; fasterthan “balanced” productivity growth indicates labour shedding, and a shortfall ofactual relative to “balanced” productivity growth is a characteristic of what isloosely called labour-intensive growth. Obviously, then, the employment neutralityhypothesis will not hold over the short-to medium term[3].In consequence, pressing ahead with labour market reforms may entail a temporaryreduction in measured productivity growth below full potential, but this shouldnot be regarded as a trade-off in any sense. A higher employment rate implies anunambiguous increase in GDP per capita with no negative implications for the long-runproductivity growth of the existing workforce. Thus, there is no inherent problemto act on both fronts simultaneously, raising the “balanced” rate of productivitygrowth using all the available instruments to stimulate TFP growth, whilst atthe same time encouraging the labour-intensive growth in the medium term that isneeded to move towards full employment[4].

2.2 The dynamic employment-productivityrelationship in recent years


EU employment andproductivity growth patterns have diverged sharply over recent years. Comparedwith the first half of the 1990’s, the period since then has witnessed a significantincrease in the contribution of labour to EU GDP growth but unfortunately thishas been accompanied by a reduction in the contribution from labour productivity,with labour productivity growth having come down by about one percentage point.From a purely growth accounting perspective, the 1 percentage point decline in EUlabour productivity emanates from 2 sources. Firstly,50% can be attributed to a reduction in the contribution from capital deepeningi.e. lower investment. Secondly, the remaining 50% appears to emanate from a deteriorationin total factor productivity i.e. a decline in the overall efficiency of the productionprocess. On top of this, cyclical conditions are estimated to have depressed annuallabour productivity growth by around 0.5 percentage points in recent years.

Bycomparison, over the same timeframe, the US has been able to combine a strong employmentperformance with acceleration in labour productivity growth. Against this background,this section investigates to what extent the recent slowdown in labour productivitygrowth may merely reflect a response to a series of positive shocks to labour supplyand jobs emanating from structural reforms and employment-friendly wage developments.

Graph2, as a starting point for the analysis, decomposes labour productivity growth intoits two components, with the US and the Rest of World included for comparison purposes.The productivity growth slowdown is evident, with the EU’s long established superiorityin terms of labour productivity growth having disappeared over recent years.

Graph 2:Decomposition of Labour Productivity Trends

/> <td/> />  

The benign interpretationof the observed productivity growth trends sees the recent deterioration in performancemainly as the mirror image of structural labour market improvements. Under thisview the EU may now simply be in a transition phase whereby wage moderation andpositive labour supply shocks may have initially created a negative trade-off betweenemployment and productivity growth, basically via a temporary decline in capital-laboursubstitution. However, the dynamic adjustment path towards a new equilibrium withhigher employment and lower structural unemployment will also involve capital accumulationthat should eliminate the trade-off over the medium-term. The more pessimisticview, on the other hand, is that the labour productivity growth slowdown reflectsa genuine negative shock, either in the form of a decline in total factor productivitygrowth or additional pressures on capital productivity; clearly, in such a scenario,prospects for a recovery of labour productivity growth are much bleaker.

Obviously,both interpretations are likely to contain an element of truth, posing the analyticalchallenge to derive inference on the relative magnitude of the employment andproductivity shocks and their respective consequences for overall productivity andemployment developments. The picture is complicated by a third possible factor,namely aggregate demand. Both fiscal consolidation and precautionary householdsavings could have contributed to a decline in growth and, in particular, of productivitygrowth.

Wehave employed both a structural VAR analysis and a simulation using the Commission’sQUEST model to study these three shocks, shocks to employment, shocks to productivityand shocks to aggregate demand and to measure their relative importance for productivityand employment. What is of specific interest in the context of this paper is thedynamic response of productivity to structural employment shocks. In technicalterms, we use a structural VAR (SVAR) methodology, based on Stock and Watson(1988) and Blanchard and Quah (1990), for the identification of structural shocks.The intuition for shock identification in Blanchard and Quah is based on the ideathat demand shocks only have temporary effects while supply shocks have permanenteffects. Stock and Watson extend this approach and allow for separate supply contributionsfrom labour and productivity (TFP). In order to identify different supply contributions,namely those coming from employment and those coming from productivity, additionalidentification criteria must be introduced. Stock and Watson use long run restrictionsimplied by the neoclassical growth model for that task. The neoclassical growthmodel appears to be suitable, since there are at least three important featuresin the long run trends which are compatible with this model:

·                   A closetrend correlation between the growth of labour productivity and capital intensity.

·                   Capitalintensity and productivity grow at a similar rate in the long run.

·                   If onelooks over long periods of time and across the EU and the US, the employment rateappears to be unrelated with productivity growth.

Using the neoclassicalgrowth model this leads to the imposition of the following long run restrictions:

·                   The labourmarket shock can have short and long run effects on employment, productivity andinflation.

·                   The productivityshock can have long run effects on productivity and inflation but only short andmedium run effects on employment. This constraint arises from the assumption thatreal wages are indexed to productivity in the long run.

·                   The demandshock can have a long run effect on inflation only but not on employment and productivity.No long run constraint is imposed on inflation.

These three typesof restrictions imply a triangular long run structure between the growth rate ofemployment (/>), productivity (/>) and inflation(/>) on the one hand and the corresponding shocksto employment (v), productivity (e) and demand (d) on the other. If one definesthe vector


and the vector/>, then the moving average representation ofthis model is given by:

/> with />

where the matrix A(1) shows the long run restrictions. Note, this particularstructure is particularly suited to test for the short, medium and long run effectsof an employment shock. Allowing for a non-zero long run productivity effect ofan employment shock allows one to test for labour quality effects associated witha permanent change in the employment rate. A similar analysis of the employmenteffects of productivity shocks has been conducted by Gali (1999).

Theempirical results are presented in two steps. In step one, the impulse responsesfrom the estimated VAR are presented. These responses give the impact on employmentand productivity of a unit shock to employment, productivity and demand. Recallthat the identifying restrictions imply that temporary unit shocks to employmentcan have permanent effects on employment and productivity, while a unit shock todemand (inflation) can only have temporary effects.

Inorder to evaluate the quantitative magnitudes of these shocks, they are comparedto similar shocks simulated with the Euro area QUEST model. This comparison is usefulsince it shows whether orders of magnitude from these shocks are similar whentwo very distinct empirical tools are used, with the VAR model imposing very littleeconomic structure (apart from the long run constraints), while QUEST consists ofexplicitly estimated structural equations and estimated adjustment lags.

·                   Employmentshock: A positive employment shock initially leads to an increase in productivity;however, this short run positive effect in the VAR model is partly spurious. Inthe medium and long run the effect on productivity is negative, i.e. an increasein employment is associated with a decrease in labour quality. Note, though, thatthis negative long run effect is estimated to be small: a shock which leads to apermanent increase in the level of employment of about 1% is associated with along run productivity level effect of about -0.1%. Analysis based on QUEST modelsimulations yields fairly similar results to the VAR approach, but the negativeimpact upon the productivity level is slightly stronger (-0.3 instead of -0.1) overthe medium term; moreover, the QUEST model analysis does not reveal any short runincrease in productivity.

·                   Productivityshock: A positive productivity shock is associated, in the short-run, with a smallnegative employment effect. The order of magnitude of the employment effect is onlyabout one tenth of the size of the productivity shock. By implication, this analysissuggests that a structural slowdown in labour productivity growth will, by itself,not be associated with an expansion of employment. Again, in the QUEST model analysisa qualitatively similar pattern to the VAR emerges, but the short-run negative employmentresponse appears to be somewhat stronger.

·                   Demandshock: The demand shock is initially associated with a positive employment andproductivity effect. This result appears quite plausible, since a demand shock islikely to lead to better capacity utilisation in the short run. As the demand effectfades away and employment is slow to adjust, the productivity effect turns negativeand dies out within a year.

Graph 3: Impulse response analysis

3a) Employment shock


3b)Productivity shock



3c) Demand shock



Graph 4: QUEST analysis

4a) Employment shock


4b) Productivity shock


Inthe second step of the empirical analysis, the shocks are cumulated over the period1995q1 to 2003q4 [5] in order to derive an estimatefor the structural component in employment growth and its likely impact on productivityand vice versa. The results of this exercise are depicted in Graph 5. Thecumulated size of the employment shock over the period 1995-2003 is estimated atabout 5%. Thus, roughly one half of the overall observed employment expansion overthat period is attributed to structural trend improvements. According to the VARapproach the cumulated productivity cost of this structural employment expansionmay have amounted to ¾ of a percent; the QUEST model simulations would putthe productivity cost somewhat higher at 1 ½ per cent. Roughly translatedinto year-on-year figures using a mid-point between the VAR and QUEST estimates,this implies a reduction in annual productivity growth of around two tenths of apercentage point, equivalent to some 20 % of the observed total productivity growthslowdown, which could be attributed to positive structural shocks in the labourmarket.

Graph5: Cumulated euro area employment shock 1995 Q1 to 2003 Q 4


A further interestingresult of the VAR model relates to the question of the structural versus temporarynature of the productivity growth slowdown. Based on the underlying assumptionson the short, medium and long term impact of the various shocks, the VAR model attributesmost of the decline in productivity to a structural trend decline in productivitygrowth. As can be seen from Graph 6, the autonomous shock to productivity explainsa decline in the level of productivity of almost 5%, which would translate intoan annual average productivity growth rate effect of the order of -0.6 percentagepoints. This is fully consistent with the growth accounting result given earlierof a decline in TFP of the order of a ½ a percentage point, with TFP consideredto be a reflection of the structural component of the productivity trend.

Graph 6 also indicatesthat the autonomous productivity shock is unable to explain the increase in employment.Therefore, it is necessary to look separately at both shocks in order to give acomplete picture of both the employment and productivity developments. However,concerning productivity, the overall conclusion from the analysis suggests thatthe decline in productivity growth is to a large extent structural in nature.

Graph6: Cumulated euro area productivity shock 1995 Q1 to 2003 Q 4


Theempirical results presented above are quantitatively broadly in line with otheravailable evidence on structural labour market improvements as indicated by atrend increase in participation and a reduction in structural unemployment. Moreover,relating the productivity effect to real wage moderation also suggests that theestimated impact on short-run productivity developments is of a reasonable orderof magnitude. A stylised number for real wage moderation in the past 10 years orso would put the average annual reduction in real efficiency wages at slightlyless than ½ a per cent. Thus, back-of the envelope calculations would suggestthat real wage moderation could, on average, have reduced annual actual labourproductivity growth relative to its balanced steady-state rate by about two tenthsof a percentage point, which is well within the range derived from the VAR andQUEST model approaches. Further corroborating evidence stems from growth regressionssuggesting that about 25% of the productivity decline is due to the increase inemployment[6].

Insummary, and recalling that the overall slowdown in average annual productivitygrowth has amounted to about one percentage point, it emerges as a fairly robustresult that only some 20 % of this reduction can be attributed to the dynamic responseof productivity to positive structural shocks in the labour market.

3. Conclusions


Ina nutshell, the analysis in this paper dismisses the notion of a genuine trade-offbetween employment and productivity growth. Obviously, misguided policies to exploitsuch a trade-off have to be avoided. However, there are no reasons to think thatstructural labour market reforms boosting employment will typically entail negativeimplications for longer-term productivity growth. In particular, this paper reachesthe following conclusions:

•Thenegative relationship between productivity and employment in comparative-staticconsiderations should not be interpreted as a genuine trade-off.

•However,all else equal, a move towards full employment is likely to see a widening ofthe labour productivity gap between Europe and the US.

•Thedynamic response of productivity to positive labour supply and wage shocks may entaila temporary reduction in productivity growth rates, which, in principle could beconsidered as benign; in any case, the size of a negative effect of this type isestimated to be fairly small.

•Theincrease in employment since the mid 90s has indeed been to a significant extentthe result of such positive labour market shocks, with about one half of the additionaljobs attributed to structural improvements.

•Positiveemployment shocks can only account for a very small fraction of the observed productivityslowdown; consequently, the decline of labour productivity growth must be consideredas predominantly caused by other factors and probably not just a temporary phenomenon.Indeed, a cyclical pick-up in labour productivity growth after the recent periodof weak output growth should not divert attention from the “deeper” structuralproblem of a slowdown in trend productivity growth.

The implicationsof the above findings for the Lisbon strategy are straightforward: Indeed, “themore jobs the better” may serve as a simple catch-phrase characterising the principalgoal of labour market reform efforts since there is no genuine trade-off – inthe sense of a difficult decision to be made – between policies to raise the employmentrate and policies to foster productivity growth. Of course, misguided policies attemptingto exploit such a trade-off have to be avoided – if, for example, policy-makerspromoted sectors with low productivity growth prospects, if they introduced unnecessaryregulations leading to “over manning”, if they discouraged young people from pursuingfurther education, or if they used funds for public training programmes in an unproductivemanner, then employment might be raised at the expense of longer-term productivitypotential. However, none of these policies is advocated in the EU’s economic andemployment policy framework and, in consequence, the employment strategy shouldnot be blamed for the dismal productivity performance in recent years.

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