Progress report on EU KLEMS project on Growth and Productivity in the European Union

1. Progress report on EU KLEMS project on Growth and Productivity in the European Union Presentation for OECD Workshop on Productivity Analysis and Measurement 17 October 2006, Bern Bart van Ark, Groningen Growth of Development Centre, University of Groningen This project is funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, "Policy Support and Anticipating Scientific and Technological Needs".

2. Main characteristics of EU KLEMS • EU KLEMS project is 3-year statistical and analytical research project funded by 6th Framework Programme • Create database on growth and productivity accounts by industry (NACE 60+) for EU member states with a breakdown into contributions from capital (K), labour (L), energy (E), materials (M) and service inputs (S) from 1970 (revision and pre-revision) • 15 research institutes across Europe and co-operation with institutes in U.S., Canada, Japan, Korea, China and Australia • Strong involvement of many national statistical institutes (NSI’s): • Provide basic data (in particular national accounts) for EU KLEMS database • Provide feedback on data use and methodologies • Validate statistical module of the database with matches official statistics (there will also be an analytical module) • Work with Eurostat and European Commission on implementation of growth and productivity accounts in national statistical programmes

3. NSI’s and other third parties actively contribute to EU KLEMS • Four status positions: • Subcontracting: Statistics Finland, ISTAT, Statistics Netherlands • Participatory status: Statistics Sweden, STATEC (Luxembourg), ONS (UK) • Observer status: INSEE, Statistics Denmark, Statistisches Bundesamt, Institute of National Statistics (Belgium), Statistics Austria, Statistics Ireland, INE (Spain), Statistical Office Slovakia, Statistical Office Poland, CSO Hungary, Czech Statistical Office, Statistical Office Slovenia, INE (Portugal), COS Malta • In contact with: NSS Greece, Lithuania, Latvia, Estonia, Cyprus • Also contacts with: • USA (Harvard University, BEA, BLS),Japan (RIETI, Hitotsubashi), Korea (SNU), China (Univ. of Beihang) Canada (Statistics Canada, University of Alberta), Australia (ABS, Productivity Commission) • Eurostat, OECD (Statistics Dept., DSTI)

4. Output from EU KLEMS database • Series on nominal values of output (gross output & value added), intermediate inputs (energy, materials, service inputs) and factor inputs (labour by age/skill/gender and capital by asset type) by industry & country, compensation of factor inputs • Volume series (1995=100 and growth rates) • Growth accounting series on output (gross output and value added-based) and contributions of intermediate, factor inputs, and total factor productivity • Additional variables:, technology variables (R&D & patents), import shares in intermediate inputs • Also comparative levels with industry specific output and input PPPs

5. Preliminary version of analytical module of database available in March 2006 Analytical module of the database • Core of the EU KLEMS database • Uses “best practice” techniques in area of growth accounting • Focuses on international consistency • Aim is full coverage (country * industry * variable) for revision period • Consider alternative or pioneering assumptions (e.g., output and price measurement of ICT goods and non-market services, measurement of skill levels, construction of capital services). • Analytical database is a research data base and are not official statistics Statistical module of the database: • To be developed parallel to the analytical module in co-operation with NSIs • Data consistent with those published by NSIs • Methods according to rules and conventions on national accounts, supply and use tables, commodity flow methods, etc. (SNA 1993, ESA 1995) or at least supported by NSI’s • Statistical module meets statistical standards of NSI's and Eurostat and can eventually be incorporated in their present statistical practices and in New Cronos.

6. Time schedule final EU KLEMS year from Sep 06 - Dec 07

7. Time schedule final EU KLEMS year from Sep 06 - Dec 07

8. “Mind the Gap”-paper based on pre-EU KLEMS data - indicative of what EU KLEMS will deliver • Compare performance of continental European countries (France, Germany, Netherlands) with Anglo-Saxon countries (Australia, Canada, UK, U.S.) • Take a bottom-up, industry approach after extensive data construction and harmonization • Analyze sources of productivity growth (1987-2003) and productivity levels (1997, extrapolated to 2003), in particular in market services • Analyze sources of gaps in productivity differentials

9. Continental European countries fall behind Anglo-Saxon due to lower uptake in ICT intensity and slowdown in TFP growth Sources of growth contributions to market economy LP growth (87-03) Anglo-Saxon Economies Continental European Economies 1987-1995 1995-2003 AUS CAN UK USA FRA DEU NLD

10. Differences mainly due to differences in TFP growth in market services Industry contributions to market economy TFP growth (1987-2003) Anglo-Saxon Economies Continental European Economies 1987-1995 1995-2003 AUS CAN UK USA FRA DEU NLD

11. Market services in continental European countries fail to transform ICT intensity in TFP growth Sources of growth contributions to market services LP growth (87-03) Anglo-Saxon Economies Continental European Economies 1987-1995 1995-2003 AUS CAN UK USA FRA DEU NLD

12. Methodology for level accounting (more tomorrow in final session on PPPs) • Dual productivity decomposition due to index number problems with primal • Decompose relative sectoral output price (PY) between countries x and y into relative input price (PX) and productivity (A): • Use CCD (Caves/Christensen/Diewert) index to aggregate across outputs (Y) and inputs (X) and industries (i)

13. Level accounting requires PPPs at industry level (more tomorrow in final session on PPPs) • A mix of production PPPs (unit value ratios) and specified expenditure PPPs for industry (gross) output (Timmer, Ypma and van Ark, 2006) • Supply and Use tables to move from gross output to sectoral output PPPs (Inklaar and Timmer, 2006) • Intermediate input PPPs: combine industry output PPPs for domestic inputs and exchange rates for imports with Supply tables to get commodity PPPs • Labour PPPs: relative wages of university & non-university labour • Capital PPPs: investment PPPs for 6 assets combined with annualization factor (relative gross return on capital)

14. Low productivity levels in market services in Anglo-Saxon economies, while high productivity levels in European service industries are eroding Anglo-Saxon Economies Continental European Economies 1997 2003 AUS CAN UK USA FRA DEU NLD

15. Labor productivity gap in Anglo-Saxon market services driven by TFP, but TFP gap small or other way in Europe Anglo-Saxon Economies Continental European Economies

16. Next steps • Are differences in productivity growth and levels in services real or are there elements of measurement error? • Understanding of high productivity levels in European market services (‘perversely’ high?) • Explaining differences in input use and productivity across industries & countries, e.g. impact of differences in outsourcing • Evaluate index number alternatives for productivity level comparisons • Improve methodology for updating to other years on basis of harmonized SUTs (in EU KLEMS) • …more tomorrow in final session on PPPs: WELCOME !