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University of Groningen
What do We Know about Services Productivity in Europe?
Bart van ArkUniversity 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
Labour Productivity (GDP per hour worked) in 1999 US$
28
30
32
34
36
38
40
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
European Union United States
Can the European Union Resume the Catching Up-Process?
-4%
-10%
-5%
-8%
6
1979-90 1990-95 1995-02 1979-90 1990-95 1995-02Total Economy* 2.16 2.41 1.64 1.20 1.14 2.46
Agriculture, Forestry and Fishing 5.3 5.5 3.6 5.2 -0.2 4.2Mining and quarrying 2.8 12.8 2.1 4.2 4.8 1.7Manufacturing 3.4 4.0 2.9 3.2 3.7 4.4Electricity, gas and water supply 2.2 4.6 6.0 1.2 1.7 1.6Construction 1.7 0.6 0.8 -0.8 0.3 0.2Distributive trades 1.3 1.7 1.0 1.6 1.6 5.4Transport 2.8 3.5 1.8 1.4 1.1 2.2Communications 5.2 6.1 8.7 2.5 3.6 6.7Financial Services 1.9 1.1 2.3 1.2 1.9 5.6Real estate -0.7 0.1 -0.6 0.6 1.7 1.2Business Services 0.5 0.7 0.1 -1.0 -0.1 0.5Other community, Social and Personal Services -1.7 0.2 0.0 0.5 1.4 0.3Public Administration, Education and Health 0.3 1.2 0.8 -0.4 -0.8 -0.4
EU-15 US
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
%-point %-contribution %-point %-contributioncontribution contribution
5 Largest contributors in USRetail trade, except of motor vehicles 0.36 15% 0.06 4%Wholesale trade and commission trade 0.35 14% 0.08 5%Electronic valves and tubes 0.31 13% 0.11 6%Financial intermediation, 0.23 9% 0.09 6%Activities auxiliary to financial intermediation 0.22 9% 0.02 1%
5 Least contributors in USFood, drink & tobacco -0.09 -4% -0.01 0%Mechanical engineering -0.05 -2% 0.00 0%Printing & publishing -0.03 -1% 0.00 0%Textiles -0.03 -1% -0.01 -1%Scientific instruments -0.02 -1% 0.00 0%
Aggregate Labour productivity growth 2.46 100% 1.64 100%
EU-15 1995-2002US 1995-2002
9
%-point %-contribution %-point %-contributioncontribution contribution
5 Largest contributors in EUCommunications 0.18 7% 0.22 13%Computer and related activities 0.09 4% 0.14 9%Legal, technical and advertising 0.07 3% 0.13 8%Electronic valves and tubes 0.31 13% 0.11 6%Health and social work 0.08 3% 0.10 6%
5 Least contributors in EUMining and quarrying -0.01 0% -0.02 -1%Insurance and pension funding 0.02 1% -0.01 -1%Textiles -0.03 -1% -0.01 -1%Clothing -0.01 0% -0.01 -1%Food, drink & tobacco -0.09 -4% -0.01 0%
Aggregate Labour productivity growth 2.46 100% 1.64 100%
EU-15 1995-2002US 1995-2002
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
Much variation by industry across countries: RetailLP growth in 1995-2002 and 1990-1995, Retail trade
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
(in
%) 1995-2002
1990-1995
Much variation by industry across countries: BanksLP growth in 1995-2002 and 1990-1995, Financial Intermediation except insurance
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Portu
gal
Germ
any
Finlan
dUK US
Denm
ark
Greec
e
EU-15
Austri
aIta
ly
Spain
Nethe
rland
s
Franc
e
Irelan
d
Sweden
Luxe
mbo
urg
Belgium
(in
%)
1995-2002
1990-1995
Much variation by industry across countries: Telecommunication Services
LP growth in 1995-2002 and 1990-1995, Communications
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Germ
any
Finlan
dIta
ly UK
EU-15
Nethe
rland
s
Sweden
Franc
eUS
Luxe
mbo
urg
Greec
e
Austri
a
Denm
ark
Spain
Portu
gal
Belgium
Irelan
d
(in
%)
1995-2002
1990-1995
Variation across industries seems to be related to aggregate productivity growth rate and somewhat
dependent on size of country: Total Economy LP growth rates and standard deviation (all industries except ICT producing industries) by country,
0
1
2
3
4
5
6
7
8
-1.000 0.000 1.000 2.000 3.000 4.000 5.000 6.000
(% growth rate)
Sta
nd
ard
de
via
tio
n b
y c
ou
ntr
y
IRE
PRT
DNK
GRC
FIN
AUT
SWE
UK
GER
US
BEL
FRA
EU-15
LUX
ITA
NLD
ESP
… although less so when looking at Market Services only
LP growth rates and standard deviation of Market Services by Country
0.00
2.00
4.00
6.00
8.00
10.00
12.00
-1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
(% growth rate)
Sta
nd
ard
de
via
tio
n
US
IRE
GRCUK
FIN
GER
PRT
SWE
AUT
NLD
DNK
EU-15
FRA
BELIT
ESP
LUX
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
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
Industry Services
Output
Input
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.
Measurement problems due to increased share of ICT
B. van Ark, Measuring the New Economy, Review of Income and Wealth, March 2002
19
Growth Accounting at Industry Level, Selected Service Industries, Netherlands and United States, 1995-2001
Share of LabourEmployment Productivity Labour ICT Non-ICT TFP
in total Growth Quality Capital Capital GrowthEmployment Growth Deepening Deepening
2001 1995-2001
NETHERLANDSMarket Services: 51.7 1.7 0.2 1.1 0.3 0.1
of which:Wholesale trade 9.3 3.6 0.2 0.9 0.1 2.4
Retail trade 7.2 1.2 0.0 0.5 0.3 0.4
Financial intermediation 4.2 -0.6 0.4 2.8 0.3 -4.0
Business services 15.8 1.0 0.3 1.0 0.6 -0.9
UNITED STATESMarket Services: 49.9 3.7 0.3 1.6 0.5 1.2
of which:Wholesale trade 6.1 6.5 0.1 1.8 0.5 4.1
Retail trade 10.3 6.3 0.1 0.7 0.3 5.2
Financial intermediation 4.5 5.4 0.1 2.9 0.9 1.5
Business services 12.3 0.0 0.2 1.7 0.2 -2.1
Contribution of:
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
EU-15 U.S. EU-15 U.S.Total Economy 2.4 1.1 1.6 2.5
ICT Producing Industries 7.0 8.3 8.5 9.3ICT Producing Manufacturing 13.2 17.4 16.0 22.6ICT Producing Services 4.6 3.1 5.9 3.1
ICT Using Industries 2.2 1.3 1.7 4.8ICT Using Manufacturing 2.9 -0.2 2.1 1.7ICT Using Services 1.8 1.7 1.6 5.3
Non-ICT Industries 2.2 0.3 1.0 0.5Non-ICT Manufacturing 3.6 2.7 2.0 1.4Non-ICT Services 1.2 -0.3 0.3 0.4Non-ICT Other 3.4 0.8 2.2 0.6
1990-1995 1995-2002
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)
Innovators in services strongly combine technological and non-technological innovations
Source: CBS, Kennis en Economie
24
NEW SERVICECONCEPT
(DIMENSION 1)
NEW CLIENTINTERFACE
(DIMENSION 2)
NEW SERVICEDELIVERY SYSTEM
(DIMENSION 3)
TECH-NOLOGICAL
OPTIONS(DIMENSION 4)
Organisation
development
Dis
tribu
tion
Marketing
capabilities, skills & attitude of existingand competing service workers (Human Resource Management)
Kno
wle
dge
of th
e ch
arac
teri
stic
s o
f ex
isti
ng a
nd c
ompe
ting
ser
vice
s (b
usin
ess
inte
llig
ence
)
char
acte
rist
ics
of a
ctua
l and
pot
enti
al c
lien
ts (
mar
ket i
ntel
lige
nce)
© Dialogic
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
The services sector is characterized by distinct innovation clusters
Towards a service innovation taxonomy (developed from Pavitt, 1984)
30
EU-15 U.S. EU-15 U.S.Total Economy 2.4 1.1 1.6 2.5
Good producing industriesSupplier dominated manufacturing 2.6 0.0 1.9 1.2Scale intensive industry 3.8 2.7 1.8 1.2Specialised suppliers manufacturing 6.6 9.9 6.6 13.3Science based manufactuirng 5.5 2.8 4.2 3.4
Service industriesSupplier dominated services 2.9 2.3 4.0 6.4Specialised supplier services 0.5 0.0 0.5 -0.3Organizational innovative services 2.4 1.1 1.4 2.6Client led services 1.2 1.3 0.3 4.2Non-market services 1.2 -0.8 0.8 -0.4
1990-1995 1995-2002
US advantages are strongest in supplier dominated services, organizational
innovative services and client led servicesLabour 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
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
Estimation results of model specification (5), 49 industries, The Netherlands
Dependent variable:
tj
tjKIBS
Y
Z
,
,,log 1987-2001† 1987-1994 1995-2001
Intercept 0.016(2.963)
0.020(2.937)
0.012(1.412)
tjtot
tjIT
rI
rI
,,
,,
0.094(1.748)
0.014(0.328)
0.072(1.846)
Number of observations 685 342 343Between parentheses are the t-values.No data for services nec and personal services were included. Data No. 742 (maritime shipping 1993)caused a severe outlier and was omitted here.
34
Productivity growth is enhanced by a combined effect of ICT-use and KIBS purchases
E s t i m a t i o n r e s u l t s o f l a b o u r p r o d u c t i v i t y r e g r e s s i o n s ( 8 ) a n d ( 9 ) f o r d i f f e r e n t t i m e p e r i o d s ,N e t h e r l a n d s
E x p l a n a t o r y v a r i a b l e s : *1 9 8 7 - 1 9 9 4
( 8 ) ( 9 )1 9 9 5 - 2 0 0 1
( 8 ) ( 9 )1 9 8 7 - 2 0 0 1
( 8 ) ( 9 )
I n t e r c e p t 2 . 3 7 9( 2 3 . 4 8 )
2 . 3 7 6( 2 2 . 8 2 )
2 . 5 4 0( 2 7 . 8 6 )
2 . 5 4 0( 2 8 . 1 7 )
2 . 4 6 6( 4 6 . 6 4 )
2 . 4 7 4( 4 6 . 8 9 )
ti
tITi
L
K
,
,,log 0 . 0 5 1( 4 . 1 7 7 )
0 . 0 5 2( 4 . 0 5 6 )
0 . 0 6 1( 5 . 5 7 0 )
0 . 0 5 0( 4 . 3 6 4 )
0 . 0 3 2( 5 . 6 0 2 )
0 . 0 3 0( 5 . 0 7 9 )
ti
tITnoni
L
K
,
,,log 0 . 1 5 7( 5 . 9 5 9 )
0 . 1 5 7( 5 . 9 3 9 )
0 . 1 9 7( 5 . 5 2 8 )
0 . 2 0 7( 5 . 8 4 4 )
0 . 1 4 8( 8 . 7 6 4 )
0 . 1 5 7( 9 . 1 2 5 )
ti
tiKIBSti
L
ZZ
,
,,,log 0 . 4 3 5( 9 . 8 6 8 )
0 . 4 3 7( 9 . 6 5 6 )
0 . 3 1 5( 8 . 8 8 0 )
0 . 3 1 1( 8 . 8 6 4 )
0 . 3 9 1( 1 6 . 1 4 )
0 . 3 8 0( 1 5 . 4 5 )
ti
tiKIBS
L
Z
,
,,log 0 . 0 7 3( 2 . 6 5 8 )
0 . 0 7 2( 2 . 6 0 5 )
0 . 1 5 2( 8 . 1 2 2 )
0 . 1 0 9( 4 . 3 6 9 )
0 . 1 8 6( 1 2 . 3 8 )
0 . 1 7 0( 1 0 . 3 2 )
I n t e r a c t i o n t e r m :
ti
tiKIBS
ti
tITi
L
Z
L
K
,
,,
,
,, loglog - - 0 . 0 0 1( - 0 . 1 6 1 )
- 0 . 0 2 0( 2 . 6 4 6 )
- 0 . 0 1 1( 2 . 5 0 5 )
A d j u s t e d R 2 0 . 9 9 5 0 . 9 9 4 0 . 9 9 6 0 . 9 9 5 0 . 9 9 1 0 . 9 9 2N u m b e r o f o b s e r v a t i o n s 3 6 8 3 6 8 3 2 1 3 6 8 6 8 9 6 8 9
I T - c a p i t a l e l a s t i c i t y o f o u t p u t 5 % 5 % 6 % 7 % 3 % 4 %* T h e 4 8 i n d u s t r y f i x e d e f f e c t d u m m i e s a r e n o t r e p o r t e d f o r c o n v e n i e n c e .T h e t - v a l u e s a r e b e t w e e n p a r e n t h e s e s .D a t a o n m i n i n g ( N o 3 1 - 6 0 ) , N o . 1 5 0 ( o i l p r o c e s s i n g 2 0 0 1 ) a n d m a r i t i m e s h i p p i n g ( N o . 4 6 6 - 4 8 0 ) c a u s e ds e v e r e o u t l i e r s a n d w e r e o m i t t e d
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
Should policies focus on service innovation or more broadly on framework conditions?
“Deepening” “Broadening” “Horizontalization”1) Broaden R&D tax
credit schemes toincludeorganisationalinnovation.
2) Include servicefirms explicitly inpolicies aimed attraining andmobility ofresearchers andpersonnel at large.
3) Include servicesectors in foresightand roadmappingactivities.
4) Create and improvescience-industryrelationships inservices.
Extend awarenessactivities more explicitlyto non-technologicalinnovation and servicefirms.
Support serviceinnovation managementin service industries.
Facilitate encountersbetween manufacturingand service innovators.
Assess comparativeadvantages of services inthe Netherlands.
Invest in servicesinnovation research.
Develop policyexperiments on serviceinnovation.
Spur innovation by sensiblederegulation and competition
Work on non-tariff tradebarriers in international tradepolicies.
Use environmentalregulations to supportinnovation.
Use general education andscience policies to create aninnovative, flexible andservice oriented labour force.
Invest in innovativegovernment services.
Consider the effects of policyareas such as spatial andtransport planning on thescope for innovation.
Improve basic statistics onservices.
37
For business, productivity is either not an explicit target or at best part of its overall
value creation model
ValueCreation
Productivity effect
Priceeffect
Activityeffect
Improvement inresource mix
Rise inproduct prices
Fallin
resourceprices
Improve-ment inproduct
mix
Improvement inoperating efficiency
Rise intechnical change
Costreductions
Quality
Innovation
Increaseeconomies of
scale
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?
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