THE PRODUCTIVITY PUZZLE 3 July 2017 Filippo DI MAURO Conference: “LIVING WITHOUT GLOBALIZATION?”

1. THE PRODUCTIVITY PUZZLE3 July 2017Filippo DI MAUROConference:“LIVING WITHOUT GLOBALIZATION?”

2. Outline Productivity puzzles and monetary policy implications 1 Steady decline of productivity: implications and reasons • Firm-levelperspective • Conclusions

3. 1 – The productivity puzzle: steady decline of productivity

4. Recent Productivity developments

5. The impact of slower productivity Lower potential output

6. The impact of slower productivity Lower r*: Secular Stagnation

7. Possible explanations • Crisis-related scarring • Financial crises can have a permanent, or certainly persistent, scarring effect on output. • Forbearance and monetary policy • Productivity may have been held back by actions of the authorities, mainly regulatory forbearance and accommodative monetary policies. • Mis-measurement • Statistical mirage, failure to capture key elements • Slowing Innovation • ICT revolution is already quite mature and future progress is likely to be slower. • Diffusion Dynamics • Slower technological diffusion from best performers to rest of the economy. • Resource reallocation • Since the crisis, evidence for capital mis-allocation in Europe.

8. 2 – The productivity puzzle: a firm-level perspective

9. THE COMPNET PROJECT  USING FIRM LEVEL INFO The 5th wave of the CompNet database • CompNet– the Competitiveness Research Network - hasbuilt a dataset on productivity indicatorsbased on firmlevel information • ….which are comparableacross the EU countriesin the map (this is rather unique) Finland Estonia Latvia Denmark Poland Germany Belgium Czech Republic Slovakia Romania France Croatia Italy Portugal Spain Malta (1): years and countries available in the last round in comparison with Eurostat

10. A firm-level perspective The rational of firm-level perspective • Why do we need a firm-level perspective? • Firm performance distribution is very disperse and asymmetric. • Rather than most firms around an “average” performance, there are lots of firms which have low productivity and only a few which are very productive in the “right-tail” of the distribution (the so called “happy few”). Labor productivity distribution across countries Germany Spain France Italy Source: CompNet (2017)

11. A firm level perspective The rational of firm-level perspective • Why do economists care about firm heterogeneity? Because they care that resources (capital and labor) are reallocated from low to high productive firms, in order to increase the economy aggregate performance. Evolution of labor productivity distribution in France

12. Frontier firms are diverging CompNet Contributions: frontier and laggards Labour productivity of frontier and non-frontier firms (annual labour productivity growth, 2002=1) Services Manufacturing Manufacturing Note: The Euro Area non-frontier productivity dynamics is computed as productivity growth of the median firm in each 2-digit sector aggregated with value added weights to the country level. Unweighted average of developments in BE, FI, FR, IT and ES. Sample is based on firms with more than 20 employees.

13. Is Resource allocation improving thus helping closing this gap? • After the crisis credit constraints are increasing for less productive firms (good sign) Leastproductive Mostproductive Share of credit constrained firms by deciles of labor productivity Source: CompNet

14. Resource allocation • ….BUT, aggregate capital allocation seems to be worsening Capital Productivity dispersion over time Source: CompNet

15. 3 – Conclusions

16. Conclusions • Uncertainty on the outlook for productivity adds to the complexity of monetary policy as decreases our ability to firm up potential estimates and appropriate interest rate patterns • The macro view on productivity hides the large and growing discrepancy among firms, the one thriving and the rest. • It is the extent in which such divergence will diminish, which is key for the overall aggregate measured productivity • We have to look therefore on evidence on resource reallocation dynamics. Is the firm selection process proceeding as it should? • Evidence available is still mixed. Further efforts are needed to gather more granular information • COMPNET…WWW.COMP-NET.ORG

17. Reserve Slides

18. U.S. GDP since 1890 The was an enormous increase in U.S. output since 1890, by a factor of 46.

19. Dangerous effects • Policies need to take this heterogeneity into account Evolution of labor productivity and labour cost in France L productivity (2003=1) • L cost (2003=1) • ULC (2003=1) L productivity (2003=1) • L cost (2003=1) • ULC (2003=1) High productive firms: Low productive firms:

20. Sources • Haldane, Andy (2017) - Speech on “Productivity puzzles”, March  http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf ) • Draghi, Mario (2017) – Speech on ‘Fostering Innovation and Entrepreneurship in the Euro area’, March https://www.ecb.europa.eu/press/key/date/2017/html/sp170313_1.en.html • Competitiveness Research Network –www.comp-net.org

21. Sources of US GDP Growth (% p.a.) • 1948-1973 is a golden era of growth • TFP the largest contributor • Labor force the second one • Sharp slowdown in 1970s, with negative (!) TFP growth • Likely cause: oil price shocks • Firms reduced energy usage, thus reducing output per same K, N • Resurgence of growth since early 1980s, particularly from mid-1990s • ICT revolution: • Higher investment • Higher productivity growth Edward Denison, BLS

22. A firm level perspective • Frontier firms are diverging • Access to international markets is critical Exporters Productivity Premium

23. The productivity puzzle: explanations • Crisis-related scarring • Financial crises can have a permanent, or certainly persistent, scarring effect on output. • First, via a collapse in credit availability constraining firms growth • As credit conditions have eased recently, however, this has become a less compelling explanation for persisting productivity problems. • A second financial channel is asset prices. A fall in property prices tightens the collateral constraint and credit conditions for firms. As asset prices have recovered, however, this channel cannot explain the persisting productivity puzzle. • Resource reallocation • Since the crisis, evidence for capital mis-allocation in Europe (see Spain). • Since the crisis also rates of labor market churn between companies have been low and dispersion in rates of return across sectors has been high. Both are consistent with lower rates of factor reallocation having contributed to low productivity.

24. The productivity puzzle: explanations • Forbearance and monetary policy • Productivity may have been held back by actions of the authorities, mainly regulatory forbearance and accommodative monetary policies. • By supporting low-productivity firms, that would otherwise fail, policy actions may have prevented the “creative destruction” thus hampering the correct functioning of the markets. • Certainly, the level of company liquidations and firm exits has remained low in many countries since the financial crisis, probably lower than would have been expected given the GDP path. • Mis-measurement • Statistical mirage, failure to capture key elements • Studies, however, find that mismeasurement alone is unlikely to account for the productivity puzzle (see Syverson (2017)) • Most mismeasurement problems existed before productivity slowdown. • These problems would need to have increased dramatically – and probably unrealistically – to fully explain the productivity slowdown.

25. The productivity puzzle: explanations • Slowing Innovation • The technological progress that backed up the productivity growth over the past two centuries may not continue at the same pace in the future (Gordon) • Current wave of innovation, grounded on ICT, does not have the same potential as past innovations. • ICT revolution is already quite mature and future progress is likely to be slower. • However, there are many emerging technologies with the potential to revolutionize the economy, such as robotics, artificial intelligence, Big Data and the human genome • Diffusion Dynamics • It arises not from slower rates of innovation, but from slower rates of technological diffusion from best performers to the rest of the economy • Might be due to: • Stifled competition in certain sectors which may have prevented the trickle-down of innovation, • management failings of small/less productive companies.

26. A firm level perspective • Frontier firms are diverging • Most productive firms captures almost all exports • Largest and mostproductivefirms are less sensitive to exchange rate fluctuations • Higherdispersion of productivitylowers export elasticities Notes: *** p<0.01, ** p<0.05, *p<0.10. Includes controls for macro determinants and sector/firm characteristics.