The Sources of Labor Productivity Growth in Norway, South Koreaand Iran: A Structural Decomposition Analysis

Transcription

1 Iran. Econ. Rev. Vol.8, No.2, 24. The Sources of Labor Productivity Growth in Norway, South Koreaand Iran: A Structural Decomosition Analysis EsfandiarJahangard Reza Ghazal Elnaz Ayoughi Received: Acceted: Abstract In this aer,using a structural decomosition analysis SDA) and the latest available inut-outut tables we investigate the sources of labor roductivity growth in Norway, South Korea and Iran. Then, the contribution of each source in the growth of labor roductivity is discussed. The results show that among six factors, value added coefficient is the most influencing factoracross all three countries regardless of the level of develoment. In contrast, labor inut coefficient shows the smallest effect on labor roductivity growth. Keywords: labor roductivity, structural decomosition analysis SDA) - Introduction A better understanding of the factors that enable sustained GDP growth is a very imortant issue esecially for the develoing countries. Among the factors, roductivity growth is usually one of the most imortant driving forces of economic growth. Since economic rogress strongly hinges on roductivity growth, the goal of increasing roductivity growth is highly imortant. In fact, higher standards of living and lower overty rate cannot be achieved without roductivity growth. The higher the roductivity in a country, the higher the income er caita will be in that country. For develoing countries, higher Assistant Professor, AllamehTabatabaei University, Iran. Senior Economist at Islamic Develoment Bank IDB), KSA. M.A. In Economics, Islamic AzadUniversity, Science and Research Branch, Iran.

2 2/ The Sources of Labor Productivity Growth in Norway, South level of roductivity can assist these countries in catching-u with their develoed eers much faster. Productivity has been and will be a hot toic for economists over decades. Back more than two centuries ago, AdamSmith cited that division of labor leads to roductivity imrovements and economic growth. He believedthat roductivity decrement results in income reduction, and therefore, decreases in level of standard of living. Lower level of standard of living on its own reduces the roductivity. Kuznets in more than a century ago also emhasized on the role of roductivity in economic growth, in which, in describing the six characteristics of growth common across develoed countries he lists high rate of roductivity growth among the to two critical factors. On the emirical front, manyto economists including Arrow, Solow, Kendrick, Kuznets, and Grilliches made efforts to comute what ortion of increase in national domestic roduct in a given eriod have been due to increase in caital, labor, and other factors including roductivity. Given this background, this aer attemts to rovide a detailed decomosition of roductivity growth which can be useful for olicy makers to set the olicies recisely and tailor the interventions accordingly. More secifically, the aer investigates the sources of imrovements in aggregate labor roductivity in Norway, South Korea and Iran using a structural decomosition analysis aroach. The methodology uses six sources of increase in labor roductivity: value added coefficient value added er unit of outut), labor inut coefficient labor inut er unit of outut), domestic suly ratio, technological change, change in share of aggregated intrasectoral final demand, and change in comosition of aggregated intersectoral final demand. This aer takes a different samle of countries as oosed to other studies that investigated a secific country, e.g., Lahr and Yang 2) for China or Jacob 23) for Indonesia, or a grou of homogeneous countries, e.g., Dietzenbacher,Hoen and Loss 2) for the west Euroean countries. It decomoses the aggregated roductivity growth in three countries, Norway, a well-develoed country, South Korea, a newly industrialized economy, and Iran, a develoing middle-income country mainly deendent on oil revenues. It is interesting to see whether the sources of roductivity

3 Iran. Econ. Rev. Vol.8, No. 2, 24. /3 growth are different among these countries which are at three deferent levels of develoment. Literature review Lahr and Yang 2) using Jacob s methodology studied the sources of labor roductivity of china over The results suggest that labor inut saving was the most influencing factor in exlaining the labor roductivity imrovements which imacted the food, textile and chemical roducts industries the most. Technological change stood at second lace, however, with negative imacts mainly on rimary inuts and governmental businesses. Value added coefficient was the third most influencing factor imacting mainly and ositively the metal industry, followed by ratio of domestic suly which imacted negatively and mainly on food, textile, and ublishing industries. The other two factors related to the final demand imacted the industries labor roductivity ositively but with smaller effects comared to the other four factors. Lahr and Yang 29) in another study examined the sources of labor roductivity in China s seven regions between using Dietzenbacher et al. 2) methodologies. The sources of roductivity studied in this aer included labor inut, value added coefficient, change in inter-sectoral structure change in technology, factor substitutions), change in outut comosition, change in trade structure in terms of goods and services used as intermediate inuts, and change in final demand. The results show that labor saving and change in value added are the most influencing factors in exlaining labor roductivity imrovements. Jacob 23) investigated the factors affecting labor roductivity of Indonesian economy over eriod. The Indonesia underwent an economic liberalization in 985. The results show that Indonesian economy witnessed imrovements in roductivity over the whole eriod, but more over ost-liberalization of eriod, with mining and oil industries on to. Among the factors, labor inut coefficient labor saving) has imacted imrovements in labor roductivity the most and technological change with the smallest and negative imacts. In addition, value added coefficient affected the roductivity negatively. Among the sectors, services exerienced the lowest roductivity imrovements esecially in re-

4 4/ The Sources of Labor Productivity Growth in Norway, South liberalization eriod. The service sector was imacted mainly by the changes in comosition of inter-sectoral final demand. Dietzenbacher,Hoen and Loss 2) in a study on labor roductivity for west Euroean countries including Belgium, Denmark, France, Germany, Italy and Netherlands, over investigated the factors affecting labor roductivity. According to the results, the average roductivity imrovements for these six countries were 24.5 ercent over eriod mainly attributable to labor inut and value added coefficients. However, inut structure and mix of final demand, even though small, imacted negatively. Among the six countries, Netherland been imacted the most by the labor inut coefficient, while Germany been imacted the most but negatively by value added coefficient. Structural Decomosition Analysis: A Background In calculating roductivity, economists use three different aroaches including Aroach, Production Function Aroach, and Inut-outut Aroach. The Aroachlinks the outut of an economy, or sector to roduction inuts, given the secific assumtions on the roduction function. Under the Production aroach, a secific roduction function is chosen mostly at firm level. Under the Inut-Outut aroach, the focus is on the decomosition analysis which is the subject of the current aer.the decomosition analysis can be groued into decomosition analysis, structural decomosition analysis, shift share analysis, and growth accounting analysis. Decomosition Analysis IDA) is based on the theory of index figures broadly alied in early 98s using indices like Lasears, and Marshal-Edgeworth. Later on, and insired by decomosition analysis in energy literature, Boyed et al 988) introduced the Divisia, and then Liu et al. 992) addressed Adative Weighting Divisia which used as a basis for the General Parametric Divisia method introduced by Ang 995). The Structural Decomosition Analysis SDA) was widely used after the seminal aer by Leontief in 94 titled as Quantitative relations of inutoutut in US economy system. Nowadays, inut-outut is widely used in quantitative analysis of economies all over the world. Shift Share Analysis is used mainly in contexts relevant to labor economics and regional sciences. It is not only an analytical tool for

5 Iran. Econ. Rev. Vol.8, No. 2, 24. /5 investigating the variations in unemloyment and growth in a region, but it is a method for forecasting the future trends. And finally growth accounting aroach addresses the share of inuts in economic growth with secial emhasis on the imact of roductivity Kendrick, 96, Jorgenson et al., 987). On a comarison basis, Structural Decomosition Analysis uses inutoutut for decomosing the changes in indices and focuses on large numbers and secific effects, while Decomosition Analysis only emloys the information at sectoral level. One strength of SDA is that it distinguishes among technological and final demand effects which is not catured under IDAJ.C.J.M, 23, Hoekstra, R, Van Der Bergh, 24). StructuralDecomosition Analysis: Methodology Productivity growth deends on a host of factors, including management; however, the aim of this is alication of an aealing methodology used for the first time by Dietzenbacher, Hoen and Loss 2), which then some small adjustments adoted by Jacob 23) and then by Yang and Lahr 2) in the context of labor roductivity. The methodology decomoses the changes in labor roductivity is as follows: N: number of sectors in inut-outut table, V: vector of value added n* vector), e: vector of labor inut n*vector ), v λ: labor roductivity n* vector), and i, e A: technical coefficient matrix n*n matrix) with the a ij as tyical element denoting the inut of roduct i er unit of outut in industry j; I: identitymatrix n*n), B: Normalized final demand n k matrix), where each cell is derived as the ratio of the corresonding cell in the final demand matrix to its resective column sum; i - The details of this method can be found in Perloff et al. 96) and Stevons and Moors 98).

6 6/ The Sources of Labor Productivity Growth in Norway, South y: aggregate final demand for each of k categories rural consumtion, urban consumtion, government consumtion, gross fixed caital formation, inventory stock, exort and other) k vector); Ĕ: diagonal matrix with elements e i as the labor inut er unit of outut in industry i in the diagonal and off-diagonal, V : diagonal matrix with elements v i as the value-added er unit of outut in industry i in the diagonal and off-diagonal n n matrix);and, P : diagonal matrix n*n) with elements P i as the domestic suly ratio i.e., ratio of total outut to total suly) in industry i in the diagonal and off-diagonal n n matrix). Then, the vector of value added can be shown as follows: BY A I V V ˆ ) ˆ In which A is total suly-based technical coefficient matrix and y is the vector of aggregated final demands based on final consumtion of sectors including exorts, and comrises of urban household consumtion, rural household consumtion, government consumtion, caital formation, change in inventory, and errorterm. Changes in value added between eriod and eriod can be shown as: ) ˆ ) ˆ ) ˆ ) ˆ y B A I V y B A I v V V By alying the same aroach the changes in emloyment between eriod and eriod can be written as: ) ˆ ) ˆ ) ˆ ) ˆ y B A I E y B A I E e e And if the following time indices are available: ) A I L ) A I L ) A I L ) A I L

7 Iran. Econ. Rev. Vol.8, No. 2, 24. /7 Then the decomosition of value added is derived as follows: Then, the decomosition of labor inut changes is derived. By combining these two decomositions the changes of labor roductivity is derived as follows: Where: Equation.): reresents the roductivity effects resulted from changes in value added er unit of gross outut by industry, Equation.2): reresents the roductivity effects resulted from changes in labor inut requirement er unit of industry gross outut, Equation.3): reresents the effects of domestic suly changes from both intermediate inuts and final demand, Equation.4): reresents the effects resulted from changes in interindustry structure due to technological change, and factor substitution, Equation.5): reresents the changes in sectoral comosition of each category of final demand change in share of intra-sectoral final demand) Equation.6): reresents the effects of changes in macro final demand among categories comosition of inter-sectoral final demand).

8 8/ The Sources of Labor Productivity Growth in Norway, South Since the structural change decomosition analysis is not unique, there is another version of decomosition with reversed weights. Dietzenbacher and Hoen 998) find that the average of these two methods rovides results that are very close to the average of all ossible decomosition forms, shown as follows: And: By taking natural logarithm, the ercentage share of each factor in labor roductivity is derived. Data For Iran the inut-outut tables of 99, and 2 were used. The IO table for 99 includes 78 sectors and for 2, 99 sectors. Both tables were aggregated into sectors including ) agriculture, oil and gas and mining, 2) manufacturing, 3) utilities, 4) construction, 5) trade, restaurant and hotel, 6) transortation, inventory, and communications, 7) financial and monetary institutions, 8) real estate, 9) ublic, social, ersonal, and local services, and ) other services.

9 Iran. Econ. Rev. Vol.8, No. 2, 24. /9 For Norway and South Korea, the Inut-Outut tables for 2 and 25 were used. The tables comrise of 48 sectors and were aggregated into sectors, including ) agriculture, fishery, oil and gas and mining, 2) manufacturing, 3) utilities, 4) construction, 5) transortation, inventory, and communications, 6) financial and monetary institutions, 7) real estate, 8) education, 9) health, ) ublic, social, ersonal, and local services, and ) other services. The data on sectoral emloyment for Iran economy obtained from the IranStatistical Center ISC) comiled for 4 sectors. It was aggregated into sectors in corresondent to the aggregation of the Inut-Outut tables. The Norwegian and South Korean emloyment information extracted from the ILO dataset on emloyment for 7 sectors for 2 and 25. They have also been aggregated into sectors in accordance to their sectors of Inut-Outut tables. The Inut-Outut tables for all three countries were adjusted to constant rices using double adjustment methodology. For comuting the rice index of the Iran case, 997 was chosen as the base year, and the value of intermediate consumtion by sector was used to comute the intermediate consumtion rice imlicit index. And the value of economic activities outut of 99 and 2 were used to comute the outut imlicit rice index. All these data obtained from national accounts ublished annually bycentral Bank of Iran CBI). For Norway and South Korea the year 25 was chosen as the base year in order to comute the rice indexes. The data on sectoral value added which were used for calculating the imlicit rices indexes for various years obtained from the World Bank. Results Tables, 2, and 3resent the decomosition of changes in labor roductivity for Norway, South Korea and Iran are shown. Each table has three columns. The first column resents the findings of the equations.) through.6); the second column resents the findings of equations 2.) through 2.6), and the third column resents the as the geometric mean of the columns and 2. The numbers greater than zero indicates a ositive imact while the numbers less than zeroindicatenegative imacts of the factor on labor roductivity changes. By taking the natural logarithm, we can obtain the ercentages of contribution of each factor.the

10 / The Sources of Labor Productivity Growth in Norway, South results of the comutations are resented in tables 5), 6), and 7) indicating the imortance of each factor in changes of labor roductivity. Iran During the 99-2 eriod,value added er unit of outut is the most determining factor in exlaining the changes of the labor roductivity with the value of 484 ercent, mainly in transortation, communication and financial industry. The tendency to roducts with more value addition, along with the ost-war reconstruction led to economic reforms which resulted in imroving the cometitiveness of the economy. Theimacts of these reforms and changes on the roductivity of the industries have been ositive which in turn imroved the labor roductivity of the economy. The imacts on ublic services and construction have been trivial. The second most imortant factor was changes in share of intra-sectoral aggregated final demand with 237 ercent on growth of labor roductivity. Transortation and communications sectors were benefited the most while the real estate and social and ublic sectors were benefited the least. The third most influential factor, however negative, was the comosition of inter-sectoral final demand. It imacted the financial sector the most with -7 ercent. The minimum negative effect belongs to other services. The fourth factor is the effect of changes in ratio of domestic suly to the intermediate inuts and final demand. This factor reresents the degree of caability of the domestic demand to satisfy the roduction needs of intermediate inuts and final demand. The imacts are ositive on all sectors

11 Iran. Econ. Rev. Vol.8, No. 2, 24. / but social and ublic sector and other services. The negative effects oint to the substitution of the domestic suly by the imorts. Using more imorted goods and services results in labor saving and therefore increasing the idle caacity for the labor. It can also reduce the share of value added if imorts substitute the high- roductivity domestic roducts. The highest imact was on merchandise, restaurants and hotel sector with 58 ercent. The fifth factor in terms of imacts belongs to the technological change with 2 ercent share, with insignificant effect onagriculture and mining, construction and social and ublic services. It imacted manufacturing, merchandise, restaurant and hotel the most. The least imortant factor is the labor inut coefficient or change in labor inut needed er each unit of gross outut. Its value is.8 ercent and imacted the sectors negatively with highest belongs to the other services. Its effects on most of the sectors are very low and negative. South Korea During 2-25 eriod, the first and most imortant factor in labor roductivity imrovement was value added coefficient, i.e., changes in value added er each unit of gross outut of sectors, at 283 ercent. The imacts on all sectors are ositive with highest imact on social and ublic sectors with 3 ercent. The minimum imact, ercent, was on health and financial sectors. The second lace belongs to the changes in share of aggregated intrasectoral final demand. The effects on health and financial sectors are negative even though very low. The imacts on all other sectors are ositive with social and ublic service sectors with highest imact at 5 ercent.

12 2/ The Sources of Labor Productivity Growth in Norway, South The domestic suly ratio is the third factor. Its imact on labor roductivity imrovement was 77 ercent with highest imact on health care services and real estate and lowest negative imact on financial sector. Changes in inter-sectoral final demand is the fourth factor, however, with negative imact with the most imact on construction and the least on utilities, transortation and communication, real estate, education and health care sectors. Technological change stands in fifth lace but with negative imact. The effects on all sectors are negative and low, however, the most negative imacts on social and ublic sector and education sector. The lowest imact is on other services at -.6 ercent. Last is the labor inut coefficient with very low and decreasing imact, with the most effect on transortation and communication sectors. Norway For Norway during 2-25, same as Iran and South Korea, value added is the most effective factor on labor roductivity which contributed around 9 ercent. The imacts are ositive on all sectors excet for construction, transortation and communication. The change in share of intra-sectoral final demand is the second factor on imroving labor roductivity with highest imact on financial sector and utilities. Its effects on agriculture and mining are also ositive but very low at.6 ercent. Like value added, change in consumtion of each categories of final demand had a decreasing imact on construction, transortation and communication sectors.

13 Iran. Econ. Rev. Vol.8, No. 2, 24. /3 The domestic suly ratio is the third factor, however, with dameningeffect. Its highest imact is on the utilities with -2 ercent and lowest imact, but ositively, on education, social and ublic sectors. Its imact on financial sector is also negative. Technological change and change in inter-sectoralfinal demand between categories are the fourth and fifth factors which imacted negatively the labor roductivity. Technology affected the labor roductivity of financial sector and other services at most, and the agriculture and mining at least. However, the effects of the change in inter-sectoralfinal demand between categories, manufacturing, agriculture and mining affected the most negatively, and construction sector the least. Finally labor inut coefficient is the sixth and least influential factor on labor roductivity with trivial imact. It affected the health sector the most and almost no imact on utilities. Countries comarisons

14 4/ The Sources of Labor Productivity Growth in Norway, South The results show that in Iran, South Korea and Norway the value added is the most imortant factor on growth of labor roductivity followed by changes in share of intra-sectoral final demand. The third factor for South Korea and Norway is the domestic suly ratio which is ositive for South Korea but negative for Norway. The negative imact for Norway imlies that this country has substituted some of the domestic suly with foreign suly imorts) which led to labor saving of activities and therefore increased the idle caacities for the labor force. For Iran change in intersectoral comosition of final demand categories i.e., Y) is the third factor, however, the effect is negative. The fourth factor for Iran economy is the domestic suly ratio with ositive imacts. For South Korea change in comosition of iner-sectoral final demandand for Norway technological change was the fourth factor having negative imact on labor roductivity. It is interesting that the change in inter-sectoral mix of final demand for all three countries were negative. For Iran and South Korea the fifth factor are technological change, however, its imact is ositive for Iran but negative for South Korea. This result looks reasonable since South Korea is more advanced than Iran in terms of technology. In other words, Iran s economy has still some room to catch-u. For Norway, the comosition of intra-sector final demand is the fifth factor. Finally, the sixth factor for all three countries is labor inut coefficient with the smallest and negative imact on labor roductivity.

15 Iran. Econ. Rev. Vol.8, No. 2, 24. /5 Table 7: Comarisons of results across thr ee countries V E P AL) B Y Norway South Korea Iran Note: V value added), E labor inut coefficient), P domestic-suly ratio), AL) technological change), B change in comosition of inter-sectoral final demand), and Y change in comosition of intra-sectoral final demand) 5- Concluding Remarks In this aer using a structural decomosition analysis method we decomosed the sources of labor roductivity into six comonents for Iran, South Korea and Norway including value added, labor inut coefficient, domestic suly ratio, technological change, change in share of intra-sectoral final demand, and change in comosition of inter-sectoral final demand. The results show that regardless of the level of develoments for Norway, South Korea and Iran the constituent arts of labor roductivity growth behave similarly across all these three countries. The main difference lies on the magnitude of each factor in labor roductivity growth. Value added was the most influential factor in growth of labor roductivity across all three countries and esecially on service sub-sectors. Its biggest imact for Iran was on transortation and communication and financial sector. For South Korea the biggest imact was on social and ublic services and for Norway on construction, transortation and communication sector. The results also imly that Iran still has more room for benefiting from adoting cutting-edge technologies as the imact of this factor on Iran economic sectors are higher than the other two countries. References: - Ang, B.W,994). Decomosition of Industrial Energy Consumtion; The Energy Intensity Aroach. Energy Economics, 6,

16 6/ The Sources of Labor Productivity Growth in Norway, South 2- Dietzenbacher, Erik;R. Hoen,Alex and Bart Los 2), Labor Productivity in Western Euroe : An Intercountry, Interindustry Analysis Journal of Regional Science,Vol. 4, Issue 3, Hoekstra, R., and Van Der Bergh, J.C.J.M., 23). Comaring Structural and Decomosition Analysis. Energy Economics, 25, Jojo Jacob, 23), structural change, libralisation and growth: the Indonesian exerience in an inut- outut ersective, ECIS, Eindhoven University of Technology, The Netherlands. 5- Jorgenson, D.W.;Gollo, F.M. and Fraumani, B.M.,987). Productivity and US Economic Growth. Cambridge, MA, Harvard University Press. 6- Kendrick, J.W.,96). Productivity Trends in the United States. Princeton, NJ, Princeton University Press. 7- Liu, F.L, and B.W. Ang, 23). Eight Methods for Decomosing the Aggregate Energy-Intensity of Industry, Alied Energy, 76, Yang, Ling and Michael L. Lahr,2), Sources of Chinese Labor Productivity Growth: A Structural Decomosition Analysis, , China Economic Review, 2, Yang, Ling and Michael L. Lahr,29), Labor Productivity Differences in China, : An Interregional Decomosition Comosition Analysis Review of Regional Studies, 38, htt:// - htt://ww.sci.org.ir 2- htt:// 3- htt:// 4- htt://eng.bok.or.kr 5- htt://

17 Iran. Econ. Rev. Vol.8, No. 2, 24. /7 a a or ro ductivity decomosition of Iran, 99 and 2 Value Added V) Labor Inut coefficient E) Domestic suly ratio P) Technological )A change Change in share of intrasector final )B demand Change in comosition of intra-sector final demand )Y Agriculture and Mining Manufacture Utilities Construction Merchandise, restaurant, hotel Transortation and communication Financial services Real Estate Public, social, ersonal and household services Other services

18 8/ The Sources of Labor Productivity Growth in Norway, South Table 2: Labor roductivity decomosition of South Korea, 2, 25 Value Added V) Labor Inut coefficient E) Domestic suly ratio P) Technological change A) Change in share of intra-sector final demand B) Change in comosition of intra-sector final demand Y) Agriculture and Mining Manufacture Utilities Construction Transortation and communication Financial services Real Estate Education Health Public, social, ersonal and household services Other services

19 Iran. Econ. Rev. Vol.8, No. 2, 24. /9 a a or ro u ti ity decomosition of Norway, 2, 25 Value Added V) Labor Inut coefficient E) Domestic suly ratio P) Technological change )A Change in share of intra-sector final )B demand Change in comosition of intra-sector final )Y demand Agriculture and Mining Manufacturing Utilities Construction Transortation and communication Financial services Real Estate Education Health Public, social, ersonal and household services Other services

20

21 Iran. Econ. Rev. Vol.8, No.2, 24. Table 4: Share of each factor in labor roductivity of Iran ercent) over 99-2 sector V E P AL) B Agriculture and Mining Manufacture Utilities Construction Merchandise, restaurant, hotel Transortation and communication Financial services Real Estate Public, social, ersonal and household services Other services Total Table 5: Share of each factor in labor roductivity of South Korea ercent) over 2-25 sector V E P AL) B Y Agriculture and Mining Manufacture Utilities Construction Transortation and communication Financial services Real Estate Education Health Public, social, ersonal and household services

22 2/ The Sources of Labor Productivity Growth in Norway, South Other services Total Table 6: Share of each factor in labor roductivity of Norway ercent) over 2-25 sector V E P AL) B Y Agriculture and Mining Manufacture Utilities Construction Transortation and communication Financial services Real Estate Education Health Public, social, ersonal and household services Other services Total

23 Iran. Econ. Rev. Vol.8, No. 2, 24. /3