University of Groningen

1. University of Groningen What do We Know about Services Productivity in Europe? Bart van Ark University of Groningen and The Conference Board CPB Workshop on "Productivity in services: Determinants, international comparison, bottlenecks, policy" 10 June 2004, The Hague

2. Set Up of Presentation • Evidence on services productivity as source of productivity slowdown in EU-15: • 56-industry level • taxonomies (ICT using, skills, innovation type) • The suspects explaining the European productivity slowdown: • measurement • ICT and innovation in services • the role of markets • Roads forward to support services productivity growth: • innovation policies and improved framework conditions • business strategies focused on intangible capital formation

3. GGDC Studies • Bart van Ark, Robert Inklaar and Robert H. McGuckin (2003), "Changing Gear: Productivity, ICT and Service Industries in Europe and the United States", in J.F. Christensen and P. Maskell, eds., The Industrial Dynamics of the New Digital Economy, Edward Elgar, pp. 56-99 (with TCB, updated) • Mary O’Mahony and Bart van Ark, eds. (2003), EU Productivity and Competitiveness: An Industry Perspective. Can Europe Resume the Catching-up Process?, DG Enterprise, European Union, Luxembourg (downloadable from http://www.ggdc.net/) (with NIESR; updated) • Bart van Ark, Lourens Broersma and Pim den Hertog (2003), "Services Innovation, Performance and Policy: A Review", Research Series No. 6, Directorate-General for Innovation, Ministry of Economic Affairs, The Hague (with Dialogic). • Robert Inklaar, Mary O'Mahony and Marcel Timmer (2004), “ICT and Europe's Productivity Performance; Industry-level Growth Account Comparisons with the United States,” Research Memorandum GD-68, Groningen Growth and Development Centre • Robert McGuckin, Matthew Spiegelman and Bart van Ark (2004), “Retail Productivity in Europe and U.S.”, The Conference Board (forthcoming)

4. Two GGDC data bases • Industry Labour Productivity Database: series on nominal and real value added, employment and hours, 56 industries for 15 EU countries and U.S., 1979-2002 (updated) • applies U.S. hedonic deflators for ICT to ICT-producing industries • industry aggregation on the basis of Tornqvist weighting • Industry Growth Accounting Database: above + series for six asset types (of which three ICT), three skill levels, 26 industries for 4 EU countries (France, Germany, UK and Netherlands) and U.S., 1979-2001

5. Can the European Union Resume the Catching Up-Process? -8% -5% -4% -10%

6. Much variation across across industries Labour Productivity Growth for 12 Main Sectors, EU and U.S., 1979-2002

7. Most important results on labour productivity at level of 56 industries • U.S. productivity growth advantage over Europe is not ubiquitous: • In just over 50% of industries, U.S. labour productivity growth is faster than in EU (market services and high tech manufacturing) from 1995-2002 • Only a limited number of service industries account for U.S. advantage in productivity growth • At the same time there is a lot more dynamism in U.S.: • Industries with above 2% productivity growth are much more present in U.S. than in EU • In two-thirds of industries, U.S. labour productivity growth accelerates in 1995-2002 over 1990-1995 • Whereas in almost three quarters of industries, EU labour productivity growth slows down

8. Contribution of largest contributors in U.S. is substantial strongly dominated by services Contribution to aggregate labour productivity of 5 largest and 5 least contributing industries in U.S., U.S. and EU, 1995-2002

9. Contribution of largest contributors in Europe is smaller and mainly in high tech manufacturing Contribution to aggregate labour productivity of 5 largest and 5 least contributing industries in EU., U.S. and EU, 1995-2002

10. Much variation by industry across countries: Retail

11. Much variation by industry across countries: Banks

12. Much variation by industry across countries: Telecommunication Services

13. Variation across industries seems to be related to aggregate productivity growth rate and somewhat dependent on size of country: Total Economy

14. … although less so when looking at Market Services only

15. Suspect 1: Measurement problems hamper adequate assessment of service productivity • Few good studies on how big is the measurement problem concerning services productivity: • on U.S.: Triplett, J.E. and B. Bosworth (2002) ““Baumol's disease” has been cured: IT and multifactor productivity in U.S. services industries,” Brookings Institution, Washington D.C. • International: Anita Wölfl (2003), “Productivity growth in service industries – an assessment of recent patterns and the role of measurement,” STI-Working Paper 2003-07, (Paris: OECD) • Some attempts to improve measurement of services output: • Brookings workshops on “Measuring service sector output” and methodological improvements by BEA and BLS, in particular in area of financial services • Eurostat, Handbook on price and volume measures in national accounts, Luxembourg, 2001

16. Source: Anita Woelfl (2003)

17. We cannot be sure of the bias in service output measurement • Over time: • Increased size of services has impact on aggregate (Griliches, 1992; 1994) • Increased complexity of services --> multidimensionality and quality improvement • But methodological changes in e.g. financial services do not show bias in only one direction • Across countries: • Countries apply different methodologies (e.g., retail) • Part of service output measures is still based on input measures, in particular in non-market services, but there are differences in degree between countries • Measurement of PPPs in services is complicated, depending on share of intermediate inputs in gross output

18. Measurement problems due to increased share of ICT Primarily computers and other ICT goods. Solvable by using hedonic price indices, which is possible provided data availability Primarily "customised" services and public services (education, health, etc.). Should be tackled by detailed analysis of multiple dimensions of output by industry. Difficult both in methodological terms as well in terms of data Primarily semiconductors. Can be solved with hedonic price indices, provided data availability and investment flow matrices. Primarily ICT capital input. Can be solved by adjusting nominal input series with hedonic price indices. Feasible provided availability of investment flow matrices. B. van Ark, Measuring the New Economy, Review of Income and Wealth, March 2002

19. LP advantages in U.S. services are translated in TFP advantages, as U.S. investment in ICT is only slightly higher Source: Inklaar, O’Mahony and Timmer, 2003

20. Suspect 2: Service Industries do Not Sufficiently Innovate • ICT investment is an important enabler of innovation and productivity growth • … and U.S. has been more successful in obtaining productivity effects from ICT investment than EU • But productive use of ICT investment is strongly dependent on various dimensions of non-technological innovations • Productivity effects are strongest in services with supplier dominated innovations or strong organizational innovations

21. ICT taxonomy points to main differentials in ICT-using services Labour productivity by Industry Group on the basis of ICT taxonomy, EU and U.S., 1995-2002 Outside ICT-producing, EU manufacturing has productivity advantage but this advantage is eroding

22. Complementarity of technological (ICT) and non-technological innovations • Case studies: • Company evidence (McKinsey) • SIID studies on service innovation combined with firm micro firm level studies (van Ark et al., 2003) • Combined evidence from macro and sector studies (TCB Retail study) • Micro firm level studies • Special organizational and work practice surveys on U.S (Brynjolffson and others, Black & Lynch) • Recent international work (OECD/Bartelsman, Hempell, van Leeuwen/vd. Wiel) • Macro approaches: • Analysis of TFP residuals with use of R&D, innovation measures (OECD) • Cluster research with I/O and CIS tables (Broersma in van Ark et al., 2003) • Intermediate input use of KIBS as proxy for organizational innovation (Broersma and van Ark, 2004)

23. Innovators in services strongly combine technological and non-technological innovations Source: CBS, Kennis en Economie

24. A four dimensional typology of service innovation used in SIID studies Source: den Hertog and Bilderbeek (1999)

25. New measures of innovation according to4-D innovation model look promising Source: De Jong et al, EIM, 2004

26. Characteristics of service innovation • Multidimensionality is the rule • Dimensions are often renewed in other sectors through new combinations • The weights of dimensions change over time • ICT facilitates in many cases, but is not sufficient nor always necessary • Next to industry characteristics, firm strategies matter • Service innovations take place along the whole value chain • Co-operation (co-producing, co-innovating) takes place a lot • De- and re-regulation is important but impact is diverse

27. The services sector is characterized by distinct innovation clusters

28. Towards a service innovation taxonomy (developed from Pavitt, 1984)

30. US advantages are strongest in supplier dominated services, organizational innovative services and client led services Labour productivity by Industry Group on the basis of combined Pavitt/ SIID taxonomy, EU and U.S., 1995-2002

31. Non-technological innovations mainly arise from investment in intangible inputs

32. Intangibles inputs are key in facilitating the innovation process and creating more productivity

33. Intensive IT users have relatively high intermediate purchases from knowledge intensive business services (KIBS), which can be used as proxy for organizational capital

34. Productivity growth is enhanced by a combined effect of ICT-use and KIBS purchases

35. Suspect 3: Rigid Markets Hamper Services Productivity Improvements • Competition helps to increase entry and exit but the effects on productivity greatly vary across industries • Comprehensive reforms (in product and labour markets) seem to be crucial • Many (de-)regulations are very industry-specific • Considerable time lags seem to be present before productivity effects emerge • Productivity may initially slow down after deregulations (e.g. retail) • A certain amount of experimentation with optimal level of deregulation is necessary

36. Should policies focus on service innovation or more broadly on framework conditions?

37. For business, productivity is either not an explicit target or at best part of its overall value creation model

38. Conclusions & questions • U.S. productivity advantages are not ubiquitous but is strongly based in market services • Measurement issues are important but biases should not be automatically assumed • There is a lot more dynamics in U.S. services (faster growth and investment, more innovation, more changes to markets) --> is more turbulence what Europe needs? • Some of U.S. productivity advantages in services cannot be easily adopted in Europe (e.g., scale effects) • How can Europe develop productivity advantages in services? • Diversity and customization? • Advance combination of manufacturing and service functions? • Set industry standards more easily?