Productivity growth in the main sectors of the Latvian economy · productivity was observed for all main sectors, excluding manufacturing and construction in 2007. • Two main factors

Productivity growth in the main sectors of the Latvian economy

Konstantīns Beņkovskis, Dr. oec.Bank of Latvia

Importance of productivity

• In the long run, productivity growth is one of the main factors in economic development.

• Only stable productivity growth will ensure an increase in the welfare of Latvian population and real convergence toward the European Union.

• Knowledge about productivity dynamics is important to ensure the realisation of economic policy.

Labour productivity

• A commonly used measure of labour productivity is value added per capita in employment.

• It is important to distinguish two effects in the growth of productivity: an increase in the ratio of capital to labour force, and an increase in production efficiency.

• The analysis of changes in labour productivity is shown for four main sectors of the Latvian economy:

– manufacturing;– construction;– wholesale and retail trade;– transport, storage and communication.

Labour productivity growth

Manufacturing

-505

101520

2000 2001 2002 2003 2004 2005 2006 2007-20020406080

Annual growth Accumulated growth (right axis)

Construction

-20-10

0102030

2000 2001 2002 2003 2004 2005 2006 2007-20-100102030


Transport, storage and communication

-10-505

1015

2000 2001 2002 2003 2004 2005 2006 2007-40-200204060


Wholesale and retail trade

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 20070

50

100

150


The volume of capital or production efficiency?

• During the last years, a sharp growth in labour productivity was observed for all main sectors, excluding manufacturing and construction in 2007.

• Two main factors behind the labour productivity growth are:– increase in the ratio of capital to labour force;– increase in production efficiency.

How to measure total factor productivity?

• Total factor productivity is an unobserved macroeconomic variable.

• It can be assessed by relating to some statisticalinformation on observable economic variables.

• The presentation is based on:– working paper "Productivity growth, adjustment costs and

variable factor utilisation: the UK case", Bank of England,April 2006;

– research on productivity growth for Latvia, Bank of Latvia(Ludmila Fadejeva un Aleksejs Meļihovs).

Measure of total factor productivity growth: the Solow residual

• Standard measure of total factor productivity growth: the Solow residual.

• It is calculated as that part of output growth whichcannot be accounted for by the primary factors of production.

• The source of the calculation is a production function – input factor cost shares are used as parameters of

production function.

Measure of total factor productivity growth:the Solow residual

From the production function:

Output growth (dy)– intermediate consumption growth (cMdm)– output growth defined by the growth of capital (cKdk)– output growth defined by the growth of labour force (cLdl)-----------------------------------------------------------------------------= total factor productivity growth (dz)

dlcdkcdmcdydz LKM −−−=

dzdlcdkcdmcdy LKM +++=


Manufacturing

-10

-8

-6

-4

-2

02

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, %

ProductivityLabour force

CapitalInterm. consumption

Output


Construction

-10

-5

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, % Productivity

Labour force

Capital

Interm. consumption

Output



-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, % Productivity

Labour force

Capital

Interm. consumption

Output



-4

-2

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, % Productivity

Labour force

Capital

Interm. consumption

Output

The Solow residual approach: conclusions

• The results of the Solow residual approach show a very low growth or even a fall in total factor productivity during the last years (especially in 2007).

• An increase in output and labour productivity growth was mainly determined by the growth of capital stocks.

• Opposite to other sectors, labour productivity growth in transport, storage and communication sectorsshows strong and significant effect of factor productivity growth.

The Solow residual approach: weak points

• There are several disadvantages of the Solow residual approach:– intensity of factor input use does not change;– data used as a measure of factor inputs (capital

stock, total working hours) usually do not represent qualitative changes, e.g. a change in thestructure of education or capital used.

Structural changes in capital factor

• Detailed analysis shows that structural changes in capital aggregate are present:– the share of equipment and machinery in fixed

assets of firms increased;– a faster growth in the share of productive capital

determined an increase in production potential.

Capital stock: actual and evaluated values (taking into account structural changes)

Manufacturing

50100150200250300

1999 2000 2001 2002 2003 2004 2005 2006 2007Capital (with structural changes)Capital

Construction

0

200

400

600

1999 2000 2001 2002 2003 2004 2005 2006 2007Capital (with stuctural changes)Capital


5075

100125150175200

1999 2000 2001 2002 2003 2004 2005 2006 2007Capital (with structural changes)Capital


50100150200250300350

1999 2000 2001 2002 2003 2004 2005 2006 2007Capital (with sructural changes)Capital

Structural changes in labour factor

• Minor changes in the structure of labour factor are present:– the share of employees with high level of

education increased slightly in manufacturing, wholesale and retail, as well as transport, storage and communication sectors;

– overall improvement of the labour force quality is present.

The number of employees: actual and evaluated values (taking into account structural changes)

Manufacturing

80859095

100105110

1999 2000 2001 2002 2003 2004 2005 2006 2007Employees (with structural changes)Employees

Construction

70100130160190220250



8090

100110120130140



90100110120130140


Intensity of input factor utilisation

• Statistical data on intensity of input factor utilisation are not available.

• The intensity of input factor utilisation can be obtained from a theoretical model using available statistical information.

Intensity of input factor utilisation

• Solving the optimisation problem of a firm, it can be shown that:

• Changes in intensity of input factor utilisation (du) arepresented by:– the change in working hours (dh);– the change in the ratio of intermediate consumption to

capital (dm-dk);– the change in the ratio of investment to capital (di-dk).

( ) ( )dkdidkdmdhdu −+−+= 321 βββ

Total factor productivity growth taking into account intensity of input factor utilisation

Manufacturing

-15

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, %

Productivity

Intensity of factor utilisation

Scale effect

Labour force

Capital

Interm. consumption

Output


Construction

-10

-5

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, %

Productivity


Scale effect

Labour force

Capital

Interm. consumption

Output



-10

-5

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, %

Productivity


Scale effect

Labour force

Capital

Interm. consumption

Output



-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007

Ann

ual g

row

th, %

Productivity


Scale effect

Labour force

Capital

Interm. consumption

Output

Total factor productivity estimates

Manufacturing

-10-8-6-4-2024

2000 2001 2002 2003 2004 2005 2006 2007Solow residual Improved method

Construction

-6-4-2024



-4-202468



-4-202468


Conclusions (I)

• In 2007, a decrease in input factor use is obtained. This can be explained by:– a high level of investment in 2007, therefore new

capital was not fully utilised; – a decrease in demand volumes, which caused a

shrinkage in employed factor volumes.

• The changes in total factor productivity are mostly positive.

Conclusions (II)

• During the last years, labour productivity was mostly determined by an increase in capital per capita.

• Total factor productivity growth also had a positive effect on labour productivity.

• An increase in factor productivity (efficiency) is an important precondition for successful convergence toward the European Union.

Documents

Productivity growth in the main sectors of the Latvian economy · productivity was observed for all main sectors, excluding manufacturing and construction in 2007. • Two main factors