Productivity statistics

The real economy and the crisis: revisiting productivity fundamentals

 

Introduction

30/04/09 - Discussions about the current crisis often present events in a sequence, such as that the US sub-prime crisis in August 2007 triggered a major inter-bank credit crisis, which transformed itself into a general credit crisis, the latter having an impact on the real economy and overall business and consumer confidence. However, some commentators have made reference to other explanations, more linked to the evolution of economic fundamentals. Therefore it is interesting to investigate what was actually happening to some data concerning the real sector and especially productivity trends in the major OECD member economies before the 2008 financial crisis. An issue with productivity data, notably multi-factor productivity (MFP) which is a measure of technical progress, is that the data are available with some delay (typically 1-2 year lags). Nevertheless the statistics presented below make it clear that labour productivity growth was already slowing down well before the crisis. In particular, the Construction sector in the US, which in turn can be linked to the loose credit arrangements underpinning this sector, had displayed dismal and worsening productivity performances since 2002. 

 

The vanishing productivity gap

Figure 1 shows the annual labour productivity growth in the US, Europe and Japan since 1997. A striking feature is the convergence to the bottom towards the end-period.  Discussion about why the US has historically maintained a higher productivity growth rate than Europe normally focuses on labour conditions (hiring and firing), product market regulation, and the uptake of technology. What is clear from the graph is a downward convergence of all three OECD areas by 2007, or as some have dubbed it 'a race to the bottom'. It is important to note that this convergence happened before the start of the crisis with the US showing a labour productivity growth decline since 2004.

 Figure 1

 

Which sectors are responsible for the slowdown of labour productivity in the US?

To address this question, Figure 2 breaks aggregate labour productivity into three broad sectors: Industry, Construction and Market Services. While the picture for the Industry sector is somewhat volatile, growth rates since 2005 are certainly lower than in the past 10 years. The Market Services sector has also seen a long-term fall in the trend of labour productivity growth since the 1998 peak. However, an important driver in the fall in labour productivity growth for the Total Economy is Construction. The Construction sector is around 5% of Total GDP but due to the poor productivity performance it has been a significant drag on aggregate productivity. The latter culminates in 2007, with an abysmal negative 12% labour productivity growth in Construction accounting for negative 0.6 percentage points of aggregate productivity growth. What is important to stress is that these trends started between 4 to 2 years before the crisis.

 Figures 2

 

The disconnection between the real economy and the price cum financial signals

Figure 3 shows the disconnection between the productivity trends and the price and financing conditions in the Construction and Housing sectors. The construction of new dwellings in the US remained high up to early 2006; afterwards it started to decline steadily. In parallel, the negative labour productivity growth in the construction sector, after a short improvement in 2005, started again to decelerate strongly during 2006 and 2007.  This suggesting a serious excess supply problem. In contrast the housing price bubble was still inflating in 2005, it levelled-off during 2006 but only started to decline in the beginning of 2007. It is striking that the boom-years of the mortgage and subprime business (2005-2006) coincides precisely with the periods where the productivity performance was deteriorating rapidly. As if, a substantial boost in demand through extended credit conditions could have compensated for the supply-side problems. But the real-side of the economy took finally its toll. By mid-2007, it was obvious that the Construction sector was in a unsustainable situation.

 Figure 3

 

 

Stable but poor productivity performance continues in the Euro Area

The first noticeable point about labour productivity growth in the euro area, with the exception of the Industry sector, is the low and stable values. Labour productivity growth in the euro area has remained in a 1 point range for at least the last 10 years. In contrast to this story is the Industry sector which has cycled around the higher value of 3% annual growth It is probably worth noting that labour productivity growth in the Construction sector has been negative for virtually the whole of the last 10 years.

 Figure 4

 

 

Multi-factor productivity has been deteriorating in major OECD countries

One of the major drivers of labour productivity is the pace of technical progress, usually measured by Multi-factor productivity (MFP, or the so-called growth residual). The data are derived from the OECD Productivity Database produced by the Statistics Directorate and the Directorate for Science, Technology and Industry. MFP trends in the major OECD countries provide additional evidence of the deterioration of the real economy performance in the pre-crisis years for the US and Japan. The picture is less clear and fewer data is available for the Euro area, but in 2007 the low MFP performance is also evident (Figure 5). The OECD Statistics Directorate is currently compiling a MFP database by industry.

 Figure 5

 

 

To sum-up, this brief analysis suggests that rather than the deterioration in the real economy being only caused by the financial crisis, the data support a more complex relationship. Economic historians will revisit these complex relationships in the future, but at least the lesson that should be learned is how important it is to have timely and reliable information about productivity.

 

Productivity - OECD Data Sources

 

The above commentary and graphs are based mostly on two OECD databases maintained by the OECD Statistics Directorate.

OECD System of Unit Labour Cost and Related Indicators Database
This database provides labour productivity data for all OECD member countries and a limited selection of non-member countries across eight broad economic activities. In all cases the source data is the Annual National Accounts. This data can be found here:
http://stats.oecd.org/wbos/Index.aspx?DataSetCode=ULC_ANN

OECD Productivity Database
This database presents productivity (labour productivity, capital services, and multi-factor productivity) at the aggregate level and is designed to be as comparable and consistent across countries as possible. This data can be found here:
http://stats.oecd.org/wbos/Index.aspx?DataSetCode=PDYGTH

 

 

 

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