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Productivity or Employment: Is it a choice? Andrea De Michelis Federal Reserve Board M arcello Estevão International Monetary Fund Beth Anne Wilson Federal Reserve Board January 4, 2013.

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  1. Productivity or Employment: Is it a choice?Andrea De MichelisFederal Reserve BoardMarcello EstevãoInternational Monetary FundBeth Anne WilsonFederal Reserve BoardJanuary 4, 2013

  2. The views in this presentation are solely the responsibility of the authors and should not be interpreted as reflecting the views of the International Monetary Fund or the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. 

  3. Background In general, economic theory assumes that TFP growth follows an exogenous process. Low TFP growth is seen as worrisome, as many associate it with poor economic performance. In reality, not a one-to-one relation between TFP and output growth  key motivation for this paper: TFP growth may be a “choice” variable.

  4. Take the case of Canada: TFP growth has been particularly low.

  5. In contrast, employment growthhas been quite strong.

  6. Same with hours of work.

  7. As a result, Canadian GDP growth has outperformedthe G7 average.

  8. More generally, growth in TFP and labor input are negatively correlated across the OECD.

  9. Data: Labor Input and TFP • The Conference Board Total Economy Database: total economy annual data, main 20 OECD countries, 1970-2007 • World/EU KLEMS: annual data, 14 OECD countries, 10 sectors, various sample ranges, but 1980-2007 available for most countries of interest • EU AMECO: total economy annual data, European and other G-7 countries, 1960-2013 (no hours data, used only for robustness analysis)

  10. Other Data • Sources for tax data • McDaniel (2007): payroll, income, and consumption taxes, 15 OECD countries, 1950/70-2007 • Sources for population data • United Nations • The Conference Board Total Economy Database

  11. Negative correlation of TFP and hours growth is robust, holding across datasets and labor inputs...

  12. …and across time.Correlation remains negative and significant decade by decade (except 90s.)

  13. Countries relative relationship between TFP and H growth fairly stable. Dotted lines represent averages over 1970-2007.

  14. But, some drift toward lower TFP/ stronger hours growth in Europe. (1970s and 1980s) Dotted lines represent the averages over 1970-2007 on all charts.

  15. 1990s and 2000-2007 Dotted lines represent the averages over 1970-2007 on all charts.

  16. Correlation of growth in TFP and hours varies by sector (OECD 14)

  17. But variation in industry composition does not explain cross-country variance.

  18. What could explain this negative correlation? • Measurement error? Probably not. • Measurement issues with TFP more relevant at cyclical frequencies. • Result does not depend on the database used (TED, World/EU KLEMS) • Country mix of TFP and hours growth is relatively stable over time. • Result holds within industry/country pair. • TFP as a choice variable: Given the availability of labor inputs, TFP growth is “chosen”.

  19. Causality: hypothesis • Factor endowment not only affects the choice of capital or labor-intensive technologies but also how much to invest in techniques and processes that boost TFP. • Given that productivity innovations are costly, countries with abundant labor supply may “choose” less productivity growth. • Test: Is there a causality going from labor supply shocks to TFP growth?

  20. Causality: strategy • Find variables that affect TFP growth only through the decision of hiring labor. • Use these variables as instruments in regressions linking TFP growth to hours growth. • Good candidates: • Tax wedge: differences in taxes influence labor supply and introduce a gap between MRS and MPL (Prescott, 2004, and Ohanianet al., 2007). • Population growth: availability of labor input.

  21. Causality: IV regressions using tax wedge and population growth

  22. Is the instrument independently correlated with TFP growth?

  23. Conclusions There is robust negative correlation between TFP growth and hours growth across OECD countries. At least some of this negative correlation seems to be a result of reactions to shocks in labor input. So, TFP could, in part, be a “choice” variable. This mechanism makes more sense than explanations of TFP growth differences between, say, Germany and Canada based on institutions. These are all rich, mature societies with good institutions. The endogeneity of TFP could also help explain longer-run developments in Europe and Canada.

  24. Conclusions • Looking ahead, population aging could trigger a wage adjustment and an endogenous increase in TFP growth in countries so far specialized in fast hours growth/low TFP growth. • But no guarantee, look at Japan. • Good institutions that support innovation and product market competition are always good for TFP growth, and would raise incentives to be more productive and ease transition.

  25. Thanks!

  26. TFP Growth vs. Hours Growthby Sector (G7)

  27. Results: Using Tax Wedge as an Instrument for Hours

  28. Results: Using Population Growth as an Instrument for Hours

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