Productivity Developments in the Developments in the US, EU, and China US, EU, and China Robert J. Gordon, Robert J. Gordon, Northwestern University, Northwestern University, NBER, and CEPR NBER, and CEPR Keynote Lecture Keynote Lecture Seventh Macroeconomic Policy Research Seventh Macroeconomic Policy Research Workshop on Productivity, Trade and Workshop on Productivity, Trade and Development, Development, Magyar Nemzeti Bank and CEPR, Magyar Nemzeti Bank and CEPR, Budapest, October 31, 2008 Budapest, October 31, 2008
Transcript
Observations on Recent Observations on Recent Productivity Productivity Developments in the Developments in the US, EU, and ChinaUS, EU, and China
Robert J. Gordon, Robert J. Gordon, Northwestern University, Northwestern University, NBER, and CEPRNBER, and CEPR
Keynote LectureKeynote LectureSeventh Macroeconomic Policy Research Seventh Macroeconomic Policy Research
Workshop on Productivity, Trade and Workshop on Productivity, Trade and Development,Development,
Magyar Nemzeti Bank and CEPR,Magyar Nemzeti Bank and CEPR,Budapest, October 31, 2008Budapest, October 31, 2008
Grateful for Invitation,Grateful for Invitation,Privileged to be herePrivileged to be here In the midst of a world economic crisis, it In the midst of a world economic crisis, it
is a luxury for us to think about long-run is a luxury for us to think about long-run economic growth issues in the US, EU, economic growth issues in the US, EU, and Chinaand China
Most of this talk will discuss new research Most of this talk will discuss new research results for the US and EUresults for the US and EU
My brief comments at the end about My brief comments at the end about China are those of the educated amateur, China are those of the educated amateur, motivated by a trip there a month agomotivated by a trip there a month ago
Budapest: The Site of Budapest: The Site of My Favorite Musical My Favorite Musical (courtesy of Zvi Griliches (courtesy of Zvi Griliches 1994)1994) She Loves MeShe Loves Me is a is a musicalmusical and and moviemovie with a book by with a book by Joe Joe
MasteroffMasteroff, lyrics by , lyrics by Sheldon Sheldon HarnickHarnick, and music by , and music by Jerry BockJerry Bock..
The musical is the fifth adaptation of the play The musical is the fifth adaptation of the play ParfumerieParfumerie by by HungarianHungarian playwright playwright MiklosMiklos Laszlo Laszlo, following the 1940 , following the 1940 James StewartJames Stewart--Margaret Margaret SullavanSullavan film film The Shop around the CornerThe Shop around the Corner and the 1949 and the 1949 Judy GarlandJudy Garland--Van JohnsonVan Johnson musical version musical version In the Good Old SummertimeIn the Good Old Summertime. It . It would surface yet again in 1998 as the would surface yet again in 1998 as the Tom HanksTom Hanks--Meg RyanMeg Ryan feature feature You've Got MailYou've Got Mail. The plot revolves around . The plot revolves around BudapestBudapest shop employees Georg Nowack and Amalia Balash who, shop employees Georg Nowack and Amalia Balash who, despite being consistently at odds with each other at work, despite being consistently at odds with each other at work, are unaware that each is the other's secret are unaware that each is the other's secret pen palpen pal met met through lonely-hearts ads.through lonely-hearts ads.
The original The original BroadwayBroadway production played in 1963, and the production played in 1963, and the show enjoyed a show enjoyed a West EndWest End production and award-winning production and award-winning revivals on each side of the Atlantic in the 1990s.revivals on each side of the Atlantic in the 1990s.
Theme for U. S.: Slowest Theme for U. S.: Slowest Potential Output Growth Potential Output Growth in History Since 1875in History Since 1875 Potential Output of Interest Potential Output of Interest
Separately from Productivity because Separately from Productivity because it matters for:it matters for:– LR government budget & Social SecurityLR government budget & Social Security– World balance of saving and investmentWorld balance of saving and investment– US as an economic engine for the worldUS as an economic engine for the world– LR US demand for investment, residential LR US demand for investment, residential
housing, infrastructurehousing, infrastructure
The Slowest PotentialThe Slowest PotentialOutput Growth in U. S. Output Growth in U. S. HistoryHistory Potential Output = Trend Output = Potential Output = Trend Output = Y*Y* Until recently it was common for Until recently it was common for
forecasters to project forecasters to project Y*Y* growth at 3 to growth at 3 to 3.5 percent, some even projected 4 3.5 percent, some even projected 4 percentpercent
Yet the facts provide an unhappy realityYet the facts provide an unhappy reality– 1997-2008 actual 1997-2008 actual YY growth only 2.75 growth only 2.75– Trend growth currently 2.5Trend growth currently 2.5– (paper explains how to estimate the trend)(paper explains how to estimate the trend)
What is CausingWhat is CausingSlow Slow Y* Y* GrowthGrowth Commonly assumed that US Commonly assumed that US Y*Y* growth growth
would slow due to less population growthwould slow due to less population growth But so far, population growth has not But so far, population growth has not
declineddeclined Instead, culprits are slower growth in Instead, culprits are slower growth in
productivity, hours/employee, and LFPRproductivity, hours/employee, and LFPR Much of this paper develops methods and Much of this paper develops methods and
implements them to separate cyclical implements them to separate cyclical movements from underlying trendsmovements from underlying trends
Three Goals of Three Goals of the Lecture for the U. the Lecture for the U. S.S.
#1: Project US #1: Project US Y*Y* 2008-2028 and its 2008-2028 and its components:components:
Y Y ≡ ≡ Y/H x H/E x E/L x L/N x NY/H x H/E x E/L x L/N x N(this is the “output identity”)(this is the “output identity”)
#2: #2: New interpretation of recent behavior of New interpretation of recent behavior of these components, esp. these components, esp. Y/HY/H
#3: Develop techniques for separating #3: Develop techniques for separating trends from cycles and analyzing the trends from cycles and analyzing the cyclical behavior of the componentscyclical behavior of the components
Goals of the Second Goals of the Second Section on EuropeSection on Europe Interpret the post-1995 Turnaround of Interpret the post-1995 Turnaround of
EU vs. US Labor Productivity and Hours EU vs. US Labor Productivity and Hours per capitaper capita
EU – US productivity growth turns EU – US productivity growth turns negativenegative
EU – US hours per capita growth turns EU – US hours per capita growth turns positivepositive
Why? Is there anything to the idea of Why? Is there anything to the idea of a tradeoff between productivity and a tradeoff between productivity and employment?employment?
Thinking (briefly) Thinking (briefly) about Chinaabout China Issues in discussing Chinese Issues in discussing Chinese Q/AQ/A
growth are very differentgrowth are very different I’m no expert but can readI’m no expert but can read Issues from my readingIssues from my reading
– Measurement: Level and Growth RateMeasurement: Level and Growth Rate– Sources of Growth DecompositionSources of Growth Decomposition– Explaining the PuzzlesExplaining the Puzzles
Can Capital per worker grow so fast in future?Can Capital per worker grow so fast in future? Why is TFP growth so much faster than in India Why is TFP growth so much faster than in India
or rest of East Asia?or rest of East Asia?
General Issues Raised General Issues Raised by Projections for the by Projections for the U. S.U. S. The need to make future projections of e The need to make future projections of e
projections of projections of Y* Y* raises a general issue: raises a general issue: how much of the past is relevant?how much of the past is relevant?– We project future population assuming that We project future population assuming that
baby boom of 1947-64 will not happen againbaby boom of 1947-64 will not happen again– We assume Great Depression and WWII will We assume Great Depression and WWII will
never happen againnever happen again– But what is the right time horizon to look But what is the right time horizon to look
backward at productivity growth?backward at productivity growth?– US: fast 1947-72, slow 72-95, fast 95-2004, US: fast 1947-72, slow 72-95, fast 95-2004,
then ???then ???
Topical Issues Topical Issues Achieved with this Achieved with this methodologymethodology Separate all components of “output Separate all components of “output
identity” into trend, cycle, and identity” into trend, cycle, and residualresidual
Were “jobless recoveries” of 1991-Were “jobless recoveries” of 1991-92 and 2001-03 unusual?92 and 2001-03 unusual?
Was fast productivity growth 2001-Was fast productivity growth 2001-03 just a repeat of 1991-92?03 just a repeat of 1991-92?
What has been going on in 2007-What has been going on in 2007-08? Does employment lead output?08? Does employment lead output?
To begin: History of To begin: History of U.S. Growth in U.S. Growth in Y*Y* Can’t Use Statistical Trends like H-PCan’t Use Statistical Trends like H-P
– Distortion in Great Depression and WWIIDistortion in Great Depression and WWII– Standard HP quarterly parameter of 1600 Standard HP quarterly parameter of 1600
implies that implies that Y*Y* growth declines from +3% growth declines from +3% in 1929 to in 1929 to minus 7% per yearminus 7% per year in 1933 in 1933
Solution: calculate log-linear trends Solution: calculate log-linear trends between benchmark years 1875, 1891, between benchmark years 1875, 1891, 1901, 1913, 1928, 1950, and 1954.1901, 1913, 1928, 1950, and 1954.
Post-1954 trends taken from research Post-1954 trends taken from research reported later reported later
See Table 1 in your handoutSee Table 1 in your handout
Trend Real GDP Growth Trend Real GDP Growth between Benchmark between Benchmark YearsYears
Questions about Questions about This HistoryThis History The most dramatic episodes are slow The most dramatic episodes are slow
growth 1913-28 and fast growth 1928-50growth 1913-28 and fast growth 1928-50– Contradicts real business cycle theory about Contradicts real business cycle theory about
Great DepressionGreat Depression– Raises puzzle about 1913-28, a dynamic Raises puzzle about 1913-28, a dynamic
period when electricity was applied in period when electricity was applied in manufacturingmanufacturing
Otherwise stable growth 1975-1913 and Otherwise stable growth 1975-1913 and 1950-72, then steady slowing down1950-72, then steady slowing down
Using the “Output Using the “Output Identity” to Link Income Identity” to Link Income per Capita to per Capita to ProductivityProductivity (1) Y = Y/H * H/E * E/L * L/N * N(1) Y = Y/H * H/E * E/L * L/N * N Four of five of these exhibit procyclical Four of five of these exhibit procyclical
behavior (not population 16+)behavior (not population 16+) BUT concept of productivity usually BUT concept of productivity usually
discussed in U.S. is for NFPB sectordiscussed in U.S. is for NFPB sector This equation works as long as our data This equation works as long as our data
are for are for total economy productivity total economy productivity and and total economy hours per employee.total economy hours per employee.
The Output Identity The Output Identity Allows us to . . .Allows us to . . . Estimate trends in any of the variables, Estimate trends in any of the variables,
call call xx the log of a variable and the log of a variable and x* x* its trendits trend ΔΔxx is the growth rate of the actual value is the growth rate of the actual value
and and ΔΔx*x* is the growth rate of the trend is the growth rate of the trend ΔΔ(x-x*)(x-x*) is the growth rate of the ratio of is the growth rate of the ratio of
actual to trend for any variableactual to trend for any variable We estimate regressions with We estimate regressions with ΔΔ(x-x*)(x-x*) as as
the dependent variable for four the dependent variable for four components of the output identity components of the output identity (excluding population)(excluding population)
Simplest Method to Simplest Method to Measure Trends: TTB Measure Trends: TTB MethodMethod TTB is log-linear Trends through TTB is log-linear Trends through
Benchmark quartersBenchmark quarters Quarters are those when Quarters are those when
unemployment roughly equal to the unemployment roughly equal to the natural rate (down, not up)natural rate (down, not up)
Turn to Table 2, shows 7 periodsTurn to Table 2, shows 7 periods This is our first introduction to the This is our first introduction to the
question – why doesn’t growth in Y/N question – why doesn’t growth in Y/N equal historical growth in Y/H?equal historical growth in Y/H?
Some of What We Some of What We Learn from Table 2Learn from Table 2 Real GDP growth slowed down as in Table 1 Real GDP growth slowed down as in Table 1
and the chartand the chart The five components must add up to real The five components must add up to real
GDP growth by definitionGDP growth by definition Productivity growth soared after 1995 but Productivity growth soared after 1995 but
real GDP continued to slow downreal GDP continued to slow down Hours per employee were strongly negative Hours per employee were strongly negative
in 2 periods, moderately negative in 2 in 2 periods, moderately negative in 2 periods, near zero otherwiseperiods, near zero otherwise
Employment rate barely moves, by Employment rate barely moves, by assumptionassumption
More About Table 2More About Table 2
LFPR rose strongly 1964-87, not LFPR rose strongly 1964-87, not since then (this pulls down growth since then (this pulls down growth in in Y/NY/N relative to relative to Y/H Y/H since 1987)since 1987)
Working-age Population growth Working-age Population growth peaked before 1977 but held up peaked before 1977 but held up relatively well 1997-2007relatively well 1997-2007
Simplify by Combining Simplify by Combining TermsTerms Turn to table 3Turn to table 3 Now compare annual growth rates in Now compare annual growth rates in Y/NY/N
and and Y/HY/H for the same time intervals for the same time intervals By definition any discrepancies must be By definition any discrepancies must be
equal to three labor market variables equal to three labor market variables Labor-market variables explain changing Labor-market variables explain changing
relationship between growth in relationship between growth in Y/NY/N and and Y/HY/H
Next slide presents the numbers of Table 3Next slide presents the numbers of Table 3
How Y/N Grows How Y/N Grows Differently than Y/HDifferently than Y/H
Conclusion About Real Conclusion About Real GDP TrendGDP Trend Slowdown from 4.4 in early 1960s Slowdown from 4.4 in early 1960s
to 2.5 nowto 2.5 now Viewed over decades, Viewed over decades,
productivity growth is negatively productivity growth is negatively correlated with labor force growthcorrelated with labor force growth
Hours per Employee and LFPRHours per Employee and LFPR Population Growth Decline has Population Growth Decline has
barely startedbarely started
How do Components How do Components React to Changes in React to Changes in Output Gap?Output Gap?(revisiting Okun’s Law)(revisiting Okun’s Law) First method in Table 4, look at First method in Table 4, look at
cyclical deviations in quarters cyclical deviations in quarters that have peak and trough that have peak and trough deviations for Qdeviations for Q
Then Tables 5 and 6, regressions Then Tables 5 and 6, regressions of components of output identityof components of output identity
Specification of Specification of RegressionsRegressions Dependent variables are first Dependent variables are first
differences of ratios of actual to differences of ratios of actual to trendtrend
ΔΔx’x’t t = = ΔΔ(x(xt – t – x*x*t t ))– Table 5: Table 5: H/E, E/L, L/NH/E, E/L, L/N– Table 6: Aggregate Table 6: Aggregate H, Y/HH, Y/H
Skip over Table 5,Skip over Table 5,Look at Table 6Look at Table 6 Shown are sums of coefficientsShown are sums of coefficients ** indicates significance at 1 percent, * ** indicates significance at 1 percent, *
indicates significance at 5 percentindicates significance at 5 percent Note significance of EOE dummy variablesNote significance of EOE dummy variables Bottom of table shows EOE coefficients Bottom of table shows EOE coefficients
when they are all forced to be equalwhen they are all forced to be equal Column 2: dependent variable is Column 2: dependent variable is
productivity rather than aggregate hoursproductivity rather than aggregate hours Table 7 summarizes responsesTable 7 summarizes responses
– Top panel shows change in productivity Top panel shows change in productivity relative to trend in first four quarters of relative to trend in first four quarters of recoveryrecovery
– Bottom panel the next eight quarters (i.e., Bottom panel the next eight quarters (i.e., quarters 5 through 12)quarters 5 through 12)
On average 1.59 points vs. -0.11 pointsOn average 1.59 points vs. -0.11 points Largely explained by equation, relying on Largely explained by equation, relying on
response to output change and to EOE response to output change and to EOE effecteffect
Unusual about 2001-04, growth stayed Unusual about 2001-04, growth stayed above trend in next eight quartersabove trend in next eight quarters
Now the Explanations of Now the Explanations of Changes in Productivity Changes in Productivity TrendTrend 1995-2000 productivity growth 1995-2000 productivity growth
revival, consensus that it was revival, consensus that it was driven by production and use of driven by production and use of ICT equipmentICT equipment
2001-2003 further increase in 2001-2003 further increase in trend growthtrend growth– Savage corporate cost cuttingSavage corporate cost cutting– Intangible capital hypothesisIntangible capital hypothesis
Explaining the Two Explaining the Two HypothesesHypotheses Cost Cutting in 2001-03Cost Cutting in 2001-03
– Employment declined until mid-2003 while output Employment declined until mid-2003 while output increasedincreased
– Result: unusual upsurge of productivityResult: unusual upsurge of productivity– Profits had been propped up by accounting Profits had been propped up by accounting
scandals, then collapsedscandals, then collapsed– More of manager pay relied on stock options than More of manager pay relied on stock options than
10 years earlier10 years earlier– Great pressure to revive profits and stock prices by Great pressure to revive profits and stock prices by
cutting costs, leading to massive layoffscutting costs, leading to massive layoffs Oliner-Sichel-Stiroh (2007 BPEA) support: Oliner-Sichel-Stiroh (2007 BPEA) support:
cross-industry positive correlation profit cross-industry positive correlation profit decline and employment declinedecline and employment decline
Complementary Complementary Intangible Capital Intangible Capital HypothesisHypothesis Benefits of late 1990s ICT investment Benefits of late 1990s ICT investment
was delayedwas delayed ““Learning lag” in how to use ICT Learning lag” in how to use ICT
investment, development of softwareinvestment, development of software Many of benefits of 1995-2000 ICT Many of benefits of 1995-2000 ICT
investment occurred with a lag in investment occurred with a lag in 2001-032001-03
Explains how output could grow with Explains how output could grow with employment decliningemployment declining
for cost cutting. Employment for cost cutting. Employment grew againgrew again
Intangible capital: delayed Intangible capital: delayed benefits of 1995-2000 investment benefits of 1995-2000 investment boom gradually endedboom gradually ended
ICT investment did not revive; ICT investment did not revive; returned to pre-1995 values as returned to pre-1995 values as share of GDPshare of GDP
Why Did Productivity Why Did Productivity Grow Faster than Trend Grow Faster than Trend 2007-08?2007-08? Employment declined slowly and steadily Employment declined slowly and steadily
January, 2008 until nowJanuary, 2008 until now Real GDP grew in first half 2008, news Real GDP grew in first half 2008, news
yesterday of -0.3 percent real GDP 08:Q3yesterday of -0.3 percent real GDP 08:Q3 Strong productivity growth, but temporaryStrong productivity growth, but temporary
– GDP growth in early 2008 represents shift to GDP growth in early 2008 represents shift to exportsexports
– Capital intensive, high productivityCapital intensive, high productivity– Composition effect, exports of commodities Composition effect, exports of commodities
use little laboruse little labor
Back to Original Topic:Back to Original Topic:Future Growth in Future Growth in Potential OutputPotential Output Key assumptions: population Key assumptions: population
growth, productivity, hours per growth, productivity, hours per employeeemployee
No assumed change in No assumed change in employment rate or LFPRemployment rate or LFPR
Assumed TE Productivity growth Assumed TE Productivity growth 1.6 vs. 1.7 for last 21 years1.6 vs. 1.7 for last 21 years
Result: 2.40, the slowest in Result: 2.40, the slowest in American historyAmerican history
End Result: End Result: Projections over 2008-Projections over 2008-20282028
Table 10. Actual and Predicted Annual Growth Rates
of Components of Real GDP, 1987-2008 and 2008-2028
Actual Projected
1987:2 - 2008:2 2008 - 2028
Component
Real GDP 2.86 2.40
Aggregate Hours 1.16 0.80
Household Employment 1.26 0.85
Labor Force 1.21 0.85
Working-Age Population 1.15 0.85
Related Ratios
Real GDP per Capita 1.71 1.55
Total Economy Output per Hour 1.70 1.60
Total Economy Hours per Employee -0.10 -0.05
Employment Rate 0.05 0.00
Labor-Force Participation Rate 0.06 0.00
Turning to Europe: The Turning to Europe: The Employment – Productivity Employment – Productivity Tradeoff (CEPR DP 6722 2/08)Tradeoff (CEPR DP 6722 2/08) EU labor productivity catches up to US EU labor productivity catches up to US
level up to 1995 then falls backlevel up to 1995 then falls back Hours worked moves in the opposite Hours worked moves in the opposite
directiondirection– Did one cause the other?Did one cause the other?
Major increase in heterogeneityMajor increase in heterogeneity Understanding these issues will help us Understanding these issues will help us
understand the effects of changes in understand the effects of changes in policies and institutionspolicies and institutions
Main Contribution is to Main Contribution is to the Policy Debatethe Policy Debate For 20 years, Europe had low For 20 years, Europe had low
employment and hours, high employment and hours, high unemploymentunemployment
Post-1995 Turnaround: Slower growth Post-1995 Turnaround: Slower growth productivity and faster E/Nproductivity and faster E/N
EU wants to change it all with reforms EU wants to change it all with reforms – some to raise employment, others to – some to raise employment, others to raise productivityraise productivity
You Can’t Have It Both WaysYou Can’t Have It Both Ways
Trend TE Productivity Trend TE Productivity Growth: US vs. EU-15Growth: US vs. EU-15
0
1
2
3
4
5
6
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Year
Per
cent EU-15
United States
Trend Growth in Hours Trend Growth in Hours per Capita, US vs. EU-per Capita, US vs. EU-1515
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Year
Perc
ent
EU-15
United States
Output per Capita (Y/N) Output per Capita (Y/N) Growth: Almost the Growth: Almost the SameSame
0
0.5
1
1.5
2
2.5
3
3.5
4
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Year
Per
cent
EU-15
United States
The Employment-Productivity The Employment-Productivity TradeoffTradeoff
Take any CRS production F(K,L)Take any CRS production F(K,L)Y/L=f(K/L)Y/L=f(K/L)
As long as capital is fixed, an increase in As long as capital is fixed, an increase in employment lowers labor productivityemployment lowers labor productivity
We don’t know how fast capital adjusts; We don’t know how fast capital adjusts; the tradeoff may be quantitatively smallthe tradeoff may be quantitatively small
A major goal of this research is to A major goal of this research is to quantify the tradeoffquantify the tradeoff
Turnarounds in Hours Turnarounds in Hours and Outputand Output Turnarounds are 1995-2006 minus 1980-Turnarounds are 1995-2006 minus 1980-
1995 growth1995 growth The relative turnarounds (EU minus US) The relative turnarounds (EU minus US)
cancel each other outcancel each other out
Y/H + H/N = Y/NY/H + H/N = Y/N
-2.20 1.99 -0.21-2.20 1.99 -0.21 1980-2006 Y/N growth is identical1980-2006 Y/N growth is identical But the EU is not catching up in But the EU is not catching up in levellevel of of
Y/N relative to USY/N relative to US
Regressions for E/NRegressions for E/N
Cover 1980-2003 EU-15, N=320, population Cover 1980-2003 EU-15, N=320, population weighted, all variables first differencesweighted, all variables first differences
Which explain pre-1995 decline and post-Which explain pre-1995 decline and post-1995 turnaround?1995 turnaround?
E/N Change RegressionE/N Change RegressionOutput Gap 0.52 ***
(0.05)
Product Market -0.44Regulation (0.55)
Union Density -0.46 ***(0.10)
Employment 0.86Protection Legislation (0.79)
Unemployment -0.18***Benefits (ARR) (0.05)
High Corpratism Dummy -2.04**(0.98)
Tax Wedge -0.28***(0.07)
Post-1995 Dummy 0.94 ***(0.15)
R2 0.52RMSE 1.18N 320
Our tax wedge coefficient Our tax wedge coefficient is consistent with what is consistent with what others have foundothers have found
EPL and PMR seem to EPL and PMR seem to have no effectshave no effects
Everything else has the Everything else has the correct sign – regulations correct sign – regulations and taxes reduce and taxes reduce employmentemployment
The post-1995 dummy is The post-1995 dummy is substantialsubstantial– Growth in the Growth in the
employment employment raterate rose rose by 1% after ‘95by 1% after ‘95
Need to untangle effects of policy Need to untangle effects of policy variables from time effect and output variables from time effect and output gapgap
We plot predicted values with policy We plot predicted values with policy fixed at its 1995 levelfixed at its 1995 level
Predictions of first-difference equation Predictions of first-difference equation are cumulated into levelsare cumulated into levels
The output gap and dummies are still The output gap and dummies are still allowed to vary over timeallowed to vary over time
Productivity Productivity RegressionsRegressions Suppose we are in a Cobb-Douglas world. Suppose we are in a Cobb-Douglas world.
What coefficient would we expect on What coefficient would we expect on employment?employment?
y = 0.33*k + 0.67*hy = 0.33*k + 0.67*h
(y-h) = 0.33*(k/h)(y-h) = 0.33*(k/h) If capital is fixed, the coefficient will be If capital is fixed, the coefficient will be
minus 0.33minus 0.33 If capital adjusts it will be smallerIf capital adjusts it will be smaller If labor is not homogenous it could be If labor is not homogenous it could be
larger (The last people to enter the labor larger (The last people to enter the labor force are likely the least experienced)force are likely the least experienced)
Productivity Productivity RegressionsRegressionsIdentification with IVIdentification with IVMust deal with simultaneity between Must deal with simultaneity between
employment and productivity.employment and productivity.We want variables that affect We want variables that affect
employment but not productivityemployment but not productivity The tax wedge is our best The tax wedge is our best
candidatecandidate We also consider using the post-We also consider using the post-
1995 dummy and union density1995 dummy and union density
Productivity RegressionsProductivity Regressions Tax wedge is the only Tax wedge is the only
instrument in this versioninstrument in this version Coefficient on Coefficient on
employment is twice what employment is twice what we would expectwe would expect
EPL and ARR have EPL and ARR have independent positive independent positive effects on productivityeffects on productivity
We can drive the SE on We can drive the SE on employment down to employment down to 0.10, but the result 0.10, but the result remains the sameremains the same
Conclusions about Conclusions about EuropeEurope A good deal of the changes in A good deal of the changes in
employment and productivity are employment and productivity are unexplainedunexplained
There is a strong tradeoff between There is a strong tradeoff between LP and employmentLP and employment
A 1% increase in employment raises A 1% increase in employment raises output by 0.36% in the short-runoutput by 0.36% in the short-run
The effects of policy are ambiguousThe effects of policy are ambiguousSome regulations may increase outputSome regulations may increase output
Outsider’s Perspective Outsider’s Perspective
on Chinaon China Measurement Issues (Maddison-Wu)Measurement Issues (Maddison-Wu) Debate Maddison vs. OECDDebate Maddison vs. OECD
– In 2005 Chinese total (PPP) GDP was 82 In 2005 Chinese total (PPP) GDP was 82 percent of the US (OECD 43 percent)percent of the US (OECD 43 percent)
– Implies GDP per capita 17 percent of US Implies GDP per capita 17 percent of US (OECD 10 percent)(OECD 10 percent)
Key difference according to Maddison: Key difference according to Maddison: OECD uses PPP prices disproportionately OECD uses PPP prices disproportionately based on high-end items in urban areas, based on high-end items in urban areas, not representative of all Chinanot representative of all China
Growth Rate of Real Growth Rate of Real GDPGDP Maddison-Wu (2008) revise growth with Maddison-Wu (2008) revise growth with
many detailed adjustmentsmany detailed adjustments For 1978-2003 their growth rate of total GDP For 1978-2003 their growth rate of total GDP
is 7.9, not the official rate of 9.6is 7.9, not the official rate of 9.6 Classroom exercise with M-W numbersClassroom exercise with M-W numbers
– 2005 Q ratio 82, Q/N 172005 Q ratio 82, Q/N 17– Future growth China Q 7.9, Q/N 7.3Future growth China Q 7.9, Q/N 7.3– Future growth US Q 2.4, Q/N 1.6Future growth US Q 2.4, Q/N 1.6
Catch-up dates? Catch-up dates? – Total PPP GDP, February 1, 2009!Total PPP GDP, February 1, 2009!– GDP per capita, year 2036GDP per capita, year 2036
for total economy, China vs. India for total economy, China vs. India vs. East Asiavs. East Asia
Measurement disagreements, Measurement disagreements, Bosworth-Collins vs. Maddison-Wu Bosworth-Collins vs. Maddison-Wu vs. He-Kuijsvs. He-Kuijs
Comparison of China, India, Comparison of China, India, East Asia, 1978-2004East Asia, 1978-2004
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Output Employment Q per Wkr Phys Cap. Education TFP
China
India
East Asiaa
The Big QuestionsThe Big Questions
Why did China have so much saving Why did China have so much saving and investment to achieve such fast and investment to achieve such fast growth in capital-labor ratio?growth in capital-labor ratio?
What are underlying causes of rapid What are underlying causes of rapid TFP growth?TFP growth?
Will this continue?Will this continue? Let me just tackle the TFP questionLet me just tackle the TFP question
Thinking about TFP as Thinking about TFP as the Martian Observerthe Martian Observer 10 days in India 2005, 3 days in Beijing 10 days in India 2005, 3 days in Beijing
20082008 Sources of differential TFP growthSources of differential TFP growth
– Reallocation effect: agriculture to industry Reallocation effect: agriculture to industry (this happens everywhere)(this happens everywhere)
– Reallocation effect, state-owned Reallocation effect, state-owned enterprises to private firmsenterprises to private firms
– Reallocation effect, domestic-owned firms Reallocation effect, domestic-owned firms to foreign-owned firms with frontier to foreign-owned firms with frontier technologytechnology
More Sources of High More Sources of High Chinese TFP GrowthChinese TFP Growth ““Foreign buyer effect”: Wal-Mart meets talented Foreign buyer effect”: Wal-Mart meets talented
Chinese manufacturersChinese manufacturers– Brings standard specificationsBrings standard specifications– Allows production at large scaleAllows production at large scale– Another type of reallocation effectAnother type of reallocation effect
The critical role of infrastructure and urban housingThe critical role of infrastructure and urban housing– Beijing vs. MumbaiBeijing vs. Mumbai– Highways, electricity, airportsHighways, electricity, airports– Airports: Hangzhou 2008 vs. Bangalore 2005Airports: Hangzhou 2008 vs. Bangalore 2005– Infrastructure leads growth (China) instead of being a Infrastructure leads growth (China) instead of being a
barrier to growth (India)barrier to growth (India) Hidden topic: Chinese culture. Overseas Chinese Hidden topic: Chinese culture. Overseas Chinese
have traditionally been entrepreneurs (Malaysia, have traditionally been entrepreneurs (Malaysia, Philippines, Singapore, Hong Kong)Philippines, Singapore, Hong Kong)
Can the Growth Rocket Can the Growth Rocket continue to soar?continue to soar? Reasons for skepticismReasons for skepticism
– Can’t continue to raise S and I Can’t continue to raise S and I shares forevershares forever
– Diminishing returns to investmentDiminishing returns to investment– Growing gap between coastal Growing gap between coastal
provinces and interior leaves room provinces and interior leaves room for interior catchupfor interior catchup
– Reallocation effects will diminish in Reallocation effects will diminish in importanceimportance
Conclude by Conclude by Answering my Own Answering my Own SkepticismSkepticism How could China ever have a higher How could China ever have a higher
standard of living than US with the standard of living than US with the enormous difference in quality of enormous difference in quality of housing?housing?
Answer: Western Europe also has Answer: Western Europe also has apartment-type housing but apartment-type housing but exceeds US in many dimensionsexceeds US in many dimensions– Welfare system, pensions, medical Welfare system, pensions, medical
care, longevity, absence of child care, longevity, absence of child povertypoverty
