What Creates Multi- Factor Productivity?

Transcription

1 What Creates Multi- Factor Productivity? Nicholas Crafts University of Warwick

2 MFP Volume of output/volume of total inputs d loga = d logy S K d logk (1 - S K ) d logl d log(y/l) = S K [d log(k/l)] + (1- S K ) d logh + d loga MFP growth is the residual growth of output not accounted for by growth of inputs

3 MFP Growth Improvements in technology or in the efficiency with which inputs are used Measurement error: incorrect specification of the production function, missing inputs Not usually manna from heaven Not really the measure of our ignorance As conventionally measured quite an important reason for labour productivity growth

4 Sources of Labour Productivity Growth, (% per year) Labour Productivity MFP Old OECD China India East Asia Latin America Africa Notes: East Asia excludes China; Africa is sub-saharan Africa; India time range = Sources: Bosworth & Collins (2003) updated on website; Bosworth et. al. (2006)

5 Sources of Labour Productivity Growth, (% per year) Labour Productivity MFP Old OECD China India East Asia Latin America Africa Notes: East Asia excludes China; Africa is sub-saharan Africa; India time range = Sources: Bosworth & Collins (2003) updated on website; Bosworth et. al. (2006)

6 MFP Growth in Emerging Markets Rapid MFP growth has a high catch-up component This catch-up component is primarily improvements in efficiency of factor use (Jerzmanowski, 2007) Negative MFP growth is most likely declining efficiency not technological regress MFP performance strongly influenced by institutions and economic policy

7 MFP Growth in OECD Countries Shows considerable divergence in recent past Both between Europe and the United States And within Europe Performance in marketed services is especially interesting

8 MFP Growth in the Market Economy, (% per year) Note: market services exclude post & telecommunications Market Economy Market Services Austria Belgium Denmark Finland France Germany Italy Netherlands Spain UK US Source: EU KLEMS database, November 2007 (

9 Sources of Labour Productivity Growth: Market Economy EU, (% per year) Note: EU is based on 10 countries (Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Spain, UK) Labour Productivity ICT Capital-Deepening MFP in ICT Production Other Capital Deepening Other MFP Labour Composition Source: derived from EUKLEMS data kindly provided by Bart van Ark

10 Sources of Labour Productivity Growth: Market Economy US, (% per year) Labour Productivity ICT Capital-Deepening MFP in ICT Production Other Capital Deepening Other MFP Labour Composition Source: derived from EUKLEMS data kindly provided by Bart van Ark

11 Explaining MFP Growth Business does not aim to improve MFP per se Lots of business activity potentially does raise MFP, e.g. Real cost reduction Innovation Imitation Re-location So incentive structures matter

12 Explaining Away MFP Growth Unmeasured inputs.. some investment not counted as such R + D and other intangibles Externalities (spillover effects) of investment.. share of profits underestimates true output elasticity

13 Is MFP Growth a Good Measure of Economic Performance? Depends how well it s measured and what is feasible Cross-section vs time-series comparisons MFP growth fundamental to underpinning labour productivity growth in the long-run in the face of diminishing returns Very important aspect of economic performance and is part of assessing sustainability of economic growth

14 Does Innovation Generate Supernormal Profits? (Nordhaus, 2004) Innovators capture about 2% of the total social gain from technological progress Appropriability is low (7%) and depreciation is high (20% per year) The US stock market valuation of new economy firms grew between 1995 and 2000 at a rate that implied owners could capture 90% of the social gain

15 How do Intangibles Impact on MFP Growth? Traditional approach has been to look at impact of R & D on MFP growth Standard results suggest MFP growth in most countries depends greatly on foreign R & D (Eaton & Kornum, 1999) MFP growth positively related to own industry R & D/Sales ratio and high social rate of return to R & D (Jones & Williams, 1998)

16 Incorporating Intangibles Fully into Growth Accounting Standard growth accounting formula becomes d logy* = S TK * d logtk + S IK * d logik + S L * d logl + d loga So intangibles means more output, extra input, and revised set of factor-share weights.. and ambiguous impact on MFP. In practice, intangible investment appears to be large and revised estimates show more capitaldeepening and lower MFP growth

17 Traditional Growth Accounting, Market Sector, UK & US (% per year) US US UK UK Labour Productivity Capital Deepening IT Other Labour Quality MFP Sources: Corrado et al. (2006); Marrano et al. (2007)

18 Growth Accounting with Intangibles, Market Sector, UK & US (% per year) US US UK UK Labour Productivity Capital Deepening Tangible IT Other Intangible Labour Quality MFP Sources: Corrado et al. (2006); Marrano et al. (2007)

19 How is MFP Growth Related to Investments in Intangible Organizational Capital Associated with ICT? Firm-level evidence says productivity pay off to ICT depends on successful reorganisation and tends to arrive with quite a long lag (Brynjolfsson and Hitt, 2003) Implies investments in ICT capital have a positive lagged impact on conventionally-measured MFP Growth (Basu and Fernald, 2007) Suggests important to take intangibles explicitly into account in the ICT world May explain why regulation impairs ICT investment but that aside it seems that American firms re-organize more and better (Bloom et. al., 2007)

20 Is it the Beginning of the End of the ICT Technological Revolution? ICT growth accounting contributions have fallen below their late 1990s levels in US but still above pre-1995 levels Similar story for price declines of ICT equipment Best projection I could find says further slowdown but not the end

21 ICT Contributions to US Labour Productivity Growth: Past, Present and Future (% per year) Past & Present Total ICT Capital Deepening MFP in ICT Production Memo Item: Annual ICT-Equipment Price Change (quality adjusted) Future ( ) Pessimistic Baseline Optimistic MFP in ICT Production Note: traditional growth accounting without intangible capital. Sources: Past & Present Contributions: Oliner et al. (2007); Prices & Future Contributions: Jorgenson et al. (2007)

22 Is it the Beginning of the End of the ICT Technological Revolution? ICT growth accounting contributions have fallen below their late 1990s levels in US but above pre-1995 levels still Similar story of price declines of ICT equipment Best projection I could find says further slowdown but not the end History has absolutely nothing useful to tell us