Productivity Puzzles in Europe: A Comparison of the UK, France, Germany and Spain

1. Productivity Puzzles in Europe: A Comparison of the UK, France, Germany and Spain Alex Bryson and John Forth NIESR (London) Philippe Askenazy PSE (Paris) 11th November 2014 NIESR

2. What’s the Issue? • The Great Recession • A big hit to the global economy • Affected most nations (few exceptions eg Australia and.....SPAIN) • Yet much heterogeneity in Europe • Size of GDP shock • Impact on firms • Muted impact on the labour market • So what’s going on? • How can we explain this?

3. First Findings from A New Study • Labour Productivity Puzzles in Europe (OUP forthcoming) • Askenazy, Bellman, Bryson, Chevalier, Erhel, Forth, Gerner, Hospido, Laible, & Moreno-Galbis • UK, Germany, Spain, France • 60% EU GDP • Contrasting cases • Similarities and differences

4. Structure of Presentation • Overview of Productivity Trends • What lies behind these trends? • Country specific narratives • Special focus on UK for this audience • Policy implications • Future

5. Productivity Trends

6. GDP per hour relative to UK Source: OECD

7. Growth in GDP per hour Source: OECD

8. Growth in GDP and hours worked Source: OECD

9. Puzzling Labour Market Response - Harmonized unemployment rate 1992-2013

10. What lies behind these trends? • In general, less attention given to the question in FR, DE and ES, compared with UK • But specific narratives emerge in each country • Labour market reforms • Government policy responses • Sectoral heterogeneity

11. Spain

12. Spain • Pre-recession productivity was depressed by the large share of short-term contracts and the construction sector • Productivity revival due to large composition effects: • Decline in Construction • Restrictions on temporary contracts • But also some new exporting firms more productive • And a reform in 2010 allows more firm-level bargaining, giving wage flexibility • => probably a permanent gain

13. Decline in construction (% of GDP)

14. Decline in temporary contracts Share of fixed-term contracts

15. France and Germany

16. Germany • Recession restricted to manufacturing sector • Especially exports • Favourable conditions pre-crisis: • Wage and employment moderation • Labour market reforms • Scarcity of skilled labour • Government interventions • Short-time working and bail-out packages • Within-firm flexibility • Working time accounts • Employment and competitiveness pacts

17. France • No significant compositional / cleansing effect (so within firms) • Slow down in real wage growth, but not on a par with UK • Capital investment and R&D spending stable • Key factors: • Labour market reform leads to creation of low-productivity jobs (temporary, self-employed) • Hoarding of high-skilled labour [???] • Lower returns to HPW practices

18. France Half Way Between UK and Germany? • A productivity shock but signs of a return to trend in FR and DE (but not UK) • Employment holding up in FR, but not as well as in the UK and DE • The real wage growth story is DIFFERENT • UK and DE have experienced very big wage adjustments, unlike FR

19. Average real FTE wages Source: OECD

20. The Policy Response • France a bit like Germany • Building flexibility into a “rigid” system with high protections • Seems to “matter” • Changing nature of workforce • Self-employed • Very short-term contracts • Implications for productivity remain unclear • If bad for productivity, why have them? • Cheap can be profitable even without productivity

21. UK

22. Historically slow recovery in GDP

23. Accompanied by unusually high levels of employment

24. Discussions have been about..... • Measurement error • Output, capital stock; intangibles; estimating counterfactual • The role of the Banking Sector (direct, indirect) • Whether there has been a ‘cleansing’ effect • Incentives to innovate (conflicting hypotheses) • Labour Hoarding • If so why, and how? And to what end? • The Flexible labour market • Strong labour supply, falling real wages • Capital shallowing

25. No strong cleansing effect • Temporary spike in liquidations and redundancies, but % loss making firms rose (Barnett et al) • Although no strong role for bank forbearance • Growth in productivity variance across sectors (Barnett et al, Field and Franklin) • Chief contributor to falling productivity is within sector and within firm (Riley et al; Barnett et al) • WERS: Increase in propensity of poor performers to die 2004-11 c.f. benign 1998-2004, but rate of workplace closure no different to 1998-2004 (van Wanrooy et al)

26. Figure 4 Decomposition of labour productivity growth into within and between firm

27. The Workplace Employment Relations Survey • Nationalsurvey mapping employment relations in workplaces across Britain. • Unique and comprehensive: data collected from managers, worker representatives and employees in 2,700 workplaces with 5+ employees. • Well-established:1980, 1984, 1990, 1998, 2004, 2011 • Linked employer-employee: • 2004 and 2011 cross-sections • 2004-2011 Panel

28. Incentives to Innovate? • Opportunity costs v uncertainty • Decline in product and process innovation in firms, though real R&D expenditure constant (ONS; Barnett et al). Can account for 1pp of productivity shortfall 2008-12 (Barnett et al). • WERS: Continuing work reorganization (van Wanrooy et al) - similar to early 90s (Geroski and Gregg) • Innovation rates not linked to impact of recession, but returns to innovation in terms of productivity and ‘coming out stronger’ • Some continued growth in HRM investments. Some (weak) evidence of lower financial returns, but less change than seen in France.

29. Labour hoarding? • Labour retention in the face of declining demand: % firms with falling output but constant employment doubled in recession (Barnett et al). Also apparent in WERS: • Hoarding’ unrealistic, but labour more attractive: • Rise in capital costs due to bank reluctance to lend (Broadbent) • Real hourly labour costs static between 2008 and 2013. Only 4 EU countries with falling labour costs over that period

30. What Lies Behind Falling Real Wages • Union bargaining power? • No correlation between freezes/cuts and unionisation • No correlation between pay freeze in last settlement and unionisation • Little change in union wage premium (some counter-cyclicality) • Hard to identify break point in union power • May have been some time ago? • Welfare reform • Those using public job placement service and those drawing on unemployed for recruits no more likely to freeze/cut pay • Immigration • 1 percentage point in the number of non-EEA nationals employed at a workplace raised the probability of a wage freeze or cut by roughly 0.4 of a percentage point • % non-UK EEA nationals was not significant

31. Flexible labour market? • Growth in non-standard (low-productivity?) jobs • Part-time, temporary, self-employment; often involuntary; Blanchflower underemployment index • WERS: Greater use of numerical flexibility in 2011 than 2004 • Up from 50% to 65% of workplaces • But not associated with managerial perceptions of how adversely workplace affected by recession nor with HR manager perceptions of how workplace had emerged from recession

32. Fall in capital-labour ratio • By end 2013 8% lower than counterfactual in absence of recession, accounting for 2.5pp of productivity shortfall (Bennett et al) • Pessoa and Van Reenen say accounts for 2/3 decline in labour productivity, with hours decline also important but TFP minor

33. Future • Employment/output recently reached pre-recession peak • Real wage growth remains illusive • Reforms suggest long-term prospects good (Aghion et al) • Deregulation of capital flows; Higher Education; Welfare system; Labour law • Permanent loss? • Barnett et al argue reduced investment in capital and impaired resource reallocation account for 6-9pp of 16pp shortfall in labour productivity • UK productive capacity 2/3 its pre-recession rate (Ball) • Similar to France, smaller than Spain, larger than Germany • TFP • Barnett et al.: accounts for much of underutilisation and misallocation • Pessoa and Van Reenen: no structural break

34. Productivity Puzzles in Europe: A Comparison of the UK, France, Germany and Spain Alex Bryson and John Forth NIESR (London) Philippe Askenazy PSE (Paris) 11th November 2014 NIESR