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The pre-Great Recession slowdown in productivity

(2023-06-27 10:08:44) 下一個

The pre-Great Recession slowdown in productivity

https://www.sciencedirect.com/science/article/abs/pii/S0014292116300654

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Abstract

In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have influenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.

 

Introduction

Since the Great Recession began in 2007, productivity growth in advanced economies has continually surprised to the downside.1 A severe downturn and slow recovery could affect productivity through various channels, both cyclical and structural. But, as we emphasize, the slowdown in advanced-economy total factor productivity (TFP) growth was broadly underway prior to the crisis.2 The pre-Great Recession timing suggests the importance of factors other than just the deep crisis (or ensuing policy changes) itself.

To understand the evolution of advanced-economy TFP growth prior to the crisis, we highlight three broad factors that have shaped the global economy in recent decades: Technical change, structural rigidities, and declining real interest rates and abundant credit. Each factor has attracted analysis and attention but they have not, typically, been considered together. For expositional clarity as well as data availability, we focus on a small number of major advanced economies: the U.S. and the four main Euro Area countries (Germany, France, Italy, and Spain). For the United States, which we assume is at the frontier of knowledge, we highlight the temporary burst of innovation and reallocation related to the production and use of information and communications technology (ICT) in the late 1990s and early 2000s. That burst ran its course prior to the Great Recession and forms the backdrop for continental Europe. There, we emphasize changes in the distance to the frontier that started in the mid-1990s: (i) favorable resource reallocations that did not happen because of structural rigidities in labor- and product markets (France, Germany, Italy and Spain); and (ii) also the unfavorable reallocations—rising misallocation—that did happen in response to sharp falls in the cost of funding (Italy and Spain). For southern Europe, we provide some new macro evidence in favor of theories that low real interest contributed to rising misallocation and low productivity growth.

Fig. 1 motivates our perspective. The figure shows levels of TFP for major economies.3 Post-war convergence in TFP levels stopped in the early 1980s in the U.K., France and Italy and at the end of the same decade in Germany, Spain and Japan.4 By 1995, advanced European economies were essentially equal to the U.S. level of TFP, though Spain remained somewhat behind.5 Japan was even further behind the frontier.

Between 1995 and 2007, however, countries stop moving together. The U.K. not only keeps pace with the U.S., it pulls ahead somewhat. France and Germany drift down relative to the frontier. But TFP growth in Italy, Spain and Japan plunge relative to the frontier.

To understand these trends, we first discuss the pre-GFC slowdown in productivity growth at the frontier, which we take to be the United States. Labor and total factor productivity (TFP) growth had a resurgence in the second half of the 1990s and early 2000s. But productivity growth slowed markedly prior to the GFC. We update estimates from Fernald (2014), who links this rise and fall to the production and use of information and communications technology (ICT). A large literature argues that ICT can have a broad-based and pervasive effect through its role as a general purpose technology (GPT) that fosters complementary innovations, such as business reorganization. But the transformative nature of these reorganizations is, plausibly, limited. For example, once retailing was reorganized to take advantage of faster information processing, the gains may have become more incremental.

Second, for France, Germany Italy and Spain, we highlight how labor and product market regulations made these favorable ICT-related reallocations more difficult. This view, which has arguably been the conventional wisdom since at least the mid-2000s, reflects reallocations that never happened, especially in market services such as distribution and transportation.6 In other words, the relative weakness in European productivity growth reflected the interaction of within-country institutions and changes in global technology.

Third, for peripheral European economies such as Italy and Spain, the reallocations that did occur reduced productivity. Since at least the introduction of the euro in 1999, TFP growth in Italy, Spain, and Portugal has been about zero or even negative.7 In the context of Italy, Hassan and Ottaviano (2013) describe this as “the great unlearning” of negative TFP growth. A number of studies (cited in Section 4) find that the allocation of resources worsened in southern Europe but not in other advanced economies. Other things equal, this reduced TFP growth because the average efficiency of production got worse.

Why did misallocation rise in southern Europe? A recent strand of literature (e.g., Reis, 2013; Gopinath et al.; 2015; Gorton-Ordonez, 2015) argues that low real interest rates and abundant credit led to misallocation and weak productivity growth. For example, in Reis (2013) model, capital inflows into a country that has inefficient financial intermediation not only reduces real interest rates but induces a shift towards lower quality entrepreneurs. Lower interest rates encourage more entrepreneurs to seek to create firms. At the margin, banks are willing to fund those firms rather than more productive ones because of a financial friction: Because of information asymmetries, banks allocate funds in part as a function of collateral. Collateral constraints, in turn, cap the borrowing capacity of even the most productive entrepreneurs. As a result, when interest rates fall, banks end up financing investments by less efficient firms. In other words, capital inflows that push interest rates down reduces the average productivity in the economy by lowering the bar for less productive entrepreneurs.

This mechanism can be compounded by a boom in consumption, where tradables are imported and non-tradables are produced by small and inefficient local firms. Kalantzis (2014) shows that the share of non-tradables in domestic output typically increases following episodes of capital inflows (see also Benigno et al. (2015)). Nevertheless, this shift towards non-tradables is probably not the entire story. As Gopinath et al. (2015), for example, show for Italy, Spain and Portugal, misallocation has increased within manufacturing since the launch the euro.

Finally, Challe et al. (2015) describe a third mechanism whereby low interest and “soft budget constraints” reduce the incentives to maintain good governmental institutions such as rule of law. That, in turn, reduces average productivity.

The most novel part of this paper is to provide new evidence that is consistent with a link between lower real interest rates and weaker productivity growth. In particular, we test the implication of the models described above that negative shocks to long-term interest rates should reduce productivity growth. Evidence, either from identified vector autoregressions (VARs) or from fixed-effect regressions on a panel of 18 industries for 13 OECD countries, provide some support for this conjecture. Given that real interest rates fell the most in Southern Europe, the effect of low real rates on productivity was larger in Spain and in Italy than in Germany, France, the U.K. or the U.S. These results are consistent with the estimates of Borio et al. (2016)—with different data, fewer sectors, and a larger cross-section of countries—which finds that fast credit growth leads to lower productivity growth.

To summarize, in the run-up to the crisis, trends in advanced-economy productivity involved a slowdown at the frontier and important interactions between country-specific institutions and the shocks that hit the global economy. The four main euro-area countries were not able to take full advantage of opportunities for productivity-enhancing reallocations and Spain and Italy were not able to take full advantage of declining real interest rates.

We do not address the U.K. in detail, but it seems a specific case. As Fig. 1 shows, the U.K. exceeded U.S. TFP performance from the mid-1990s–2007. But a sharp break came with the crisis, and relative TFP declined. For some continental economies, low factor utilization may still play a role in obscuring productivity trends; indeed, as of mid-2015, the OECD estimates that output gaps remain very large. But for the U.K., resource slack had sharply diminished well before this writing. Barnett et al. (2014) and Haskel et al. (2015) discuss a range of alternative explanations but conclude that much remains unexplained.

Many of the arguments here are not new. For example, Fernald, 2014 discusses the U.S. experience. van Ark et al. (2008); Van Reenen et al. (2010); Bourlès et al. (2013); Cette et al. (2014) discuss the role of labor and product market rigidities. Reis (2013); Gopinath et al. (2015); Kalantzis (2014); Challe et al. (2015) discuss southern Europe. Gorton and Ordonez (2015); Cecchetti and Kharroubi (2015); Borio et al. (2016) discuss the effects of credit booms on productivity. Our innovation is to bring together, update, and augment these sometimes disparate arguments into a single broad narrative for advanced economies. In addition, we provide new evidence on how interest rate changes may influence productivity.

The outline of the paper is as follows. Section 2 discusses facts about convergence and divergence. Section 3 discusses the ICT-related rise and fall of productivity growth in the United States and the role of labor- and product-market rigidities in Europe. Section 4 discusses the role of rising misallocation in southern Europe, along with new econometric evidence. Section 5 concludes with a discussion of implications of these pre-recession findings for understanding trends since 2007.

 

Section snippets

Facts: productivity convergence and divergence

This section discusses key stylized facts about post-war productivity growth—namely, the convergence and divergence in productivity levels that took place prior to the Great Recession. (See also previous analyses in, for example Bergeaud et al., 2014 or Crafts and O’Rourke, 2013.) As noted earlier, Fig. 1 shows the level of TFP relative to the U.S. since 1950 for selected advanced economies: The U.K., the four largest euro-area countries (Germany, France, Italy and Spain) and Japan. Fig. 2

Industry origins of the pre-Great-Recession productivity slowdown

To gain further insight into the nature of the pre-great-recession slowdown, we turn to industry data. For the United States, which we take to be at the frontier of knowledge, ICT investment and associated business reorganization plausibly explain the rise and fall of productivity growth since the mid-1990s.9

Increasing capital misallocation in peripheral Europe

This section focuses on the so-called periphery of the euro area, mainly in southern Europe. As already noted, from 1995 to 2007, TFP growth was zero or negative in this region.20

Discussion and conclusions

In major advanced economies, productivity growth was slowing prior to the Great Recession. The United States saw an exceptional burst of technological change in the second half of the 1990s and early 2000s. But that exceptional pace ended prior to the Great Recession. Other countries did not keep up with that frontier after the mid-1990s, but fell away at varying rates. Our preferred stories for Europe highlight the interaction of shocks and institutions. One shock was the ICT revolution, where 

Acknowledgments

We thank Fabio Canova, Robert Inklaar, Robert Kollmann, Eric Leeper, Werner Roeger, and seminar participants at several institutions for helpful comments. We also thank Genevieve Denoeux, Andrew Tai and Bing Wang for helpful research assistance. John Fernald thanks the Einaudi Institute for Economics and Finance for hosting him while writing much of the paper. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of San Francisco,

 
 

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