and productivity

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Structural change, labour market reforms and productivity

Pasquale Tridico Roma Tre University

INAPP, Rome, 22 November 2018

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Main structure and main hypotheses

• In last 3 decades: a decline in the share of workers in manufacture and a transition towards the service sector.

• structural change as one of the main causes for low labour productivity.

• structural change with (bad) reforms in the labour market (labour flexibility..) and labour intensive Investments

• decrease of wage share weakening AD

• Structural change + inappropriate institutional change  harmful

labour productivity.

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Main Results

• the share of employment in manufacture is positively related to the hourly labour productivity.

• the share of employment in several service industries negatively affects it.

• Countries with most of employment in low-skilled service sectors have worst performance (LP and GDP dynamics).

• In fact AD in these countries stagnated because wage dynamics is low, and in turn, GDP performance is low.

• an increase in LF and in TW, particularly in the service sector, damage LP,

while capital accumulation and an increase in the wage share enhance LP.

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-1 0 1 2 3 4 5

6 Labour Productivity growth per hours (Y/Lh) OECD 1971-2014

-0,5 0 0,5 1 1,5 2 2,5 3 3,5

OECD-Total G7

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Manufacturing share in total employment, 1970-2012

Source: EU KLEMS and OECD

0,05 0,1 0,15 0,2 0,25 0,3 0,35

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Austria Spain France Germany Italy

0,05 0,1 0,15 0,2 0,25 0,3 0,35

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Netherlands Finland Sweden UK Belgium

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Theoretical framework and literature review

• Tertiarization with decline of labour productivity is obviously not new and dates back at least to Baumol and Bowen (1965), Kaldor (1966) and Baumol (1967).

“Tertiarization may provide a structural change burden to productivity gains”

(Szirmai and Verspagen, 2015, p. 47).

• This is due in part to the fact that several service industries have a limited

potential for productivity gains and are defined by labour-intensive production processes.

• Recent Post Keynesian elements included in this analysis: financialisation and reduction of wage share

• financialisation > negative impact on labour productivity, because managers and financial corporations are more interested in maximising their bonuses, shareholders’ dividends and financial compensation rather than embarking on strategies oriented towards productive investments. In this context, assets are wasted in financial and real estate speculation and short-term strategies; no investment expansions, innovation and labour productivity gains

• Higher Wage share > has a positive effect on enhancing productivity strategies and capital intensive investments

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Baumol cost disease and investment strategies

• “growth disease”

• the service sector is quite heterogeneous

• investments and industrial strategies > specialisation of economies

• other supply side explanation > neo-Schumpeterian, education skills..

• other demand side explanation > Delli Gatti et al. (2012)

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a) Our contribution: deindustrialisation and labour market reforms

• Our contribution aims to show the importance of the shift to the service sector, which occurred well before the crisis, as a result of low capital

intensive investments in the manufacturing sector, and deindustrialisation that has occurred particularly since the 1990s in some European countries, such as Italy (Gallino, 2003; Sylos Labini, 2004).

• Deindustrialisation has been accompanied in several European countries by financialisation , by reforms in the labour market aimed at increasing

labour flexibility, decreasing labour protection and increasing temporary work. These reforms in the labour market were coupled with strong

retrenchments of welfare state spending. Both labour flexibility (labour

cost compression) and the retrenchment of the welfare state contributed

to the wage share reduction, stagnation of aggregate demand, and in turn,

to the lower dynamics of labour productivity.

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b) Our contribution: deindustrialisation and VoC

• The VoC and welfare state policy have affected the shaping of these processes.

• some European continental countries, such as Germany, have avoided, to a large extent, the deindustrialisation and have continued to invest in manufacturing and in capital intensive sectors with positive results in terms of productivity and wage

dynamics.

• Other Scandinavian countries have managed to drive the transition towards a

service sector dominated by public administration employment and social services of higher quality and standards, resulting in benefits in terms of productivity and

wages.

• Others such as Italy have experienced both deindustrialisation and migration to low

skilled service sectors, dominated by sub-sectors such as accommodations, food, and

private social, community and family services, with low productivity gains and low

wages. The deindustrialisation has been accelerated by labour intensive investments

incentivised by relatively lower wages and deep labour flexibility.

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The Italian disease…

Italian economy looks more and more like a bar economy

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Reforms of LM after July Agreement 93

• Pacchetto Treu L 196/1997

• Legge 30/2003

• Riforma Fornero 2012

• Decreto Poletti CTD

• Jobs Act / Art. 18

• Decreto Dignità  

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Austria Belgium

Bulgaria

Cyprus Czech Republic

Denmark

Estonia Finland France

Germany

Greece

Hungary

Ireland Italy

Latvia Lithuania

Luxembourg Malta

Netherlands Poland

Portugal Romania

Slovakia

Slovenia

Spain

Sweden

United Kingdom 1

1.5 2 2.5

3

EPL 2013

55 60 65 70 75

Employment rate 2013 Labour Flexibility and Employment

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Australia Austria

Belgium

Canada

Czech Republic

Denmark

Finland

France Germany

Greece

Hungary Ireland

Italy

Japan

Mexico Netherlands

New Zealand Norway

Poland

Portugal

Slovak Republic

Spain Sweden

Switzerland Turkey

United Kingdom United States

OECD Total

0 1 2 3 4 5

-1.5 -1 -.5 0 .5

EPL 1990-2012 Labour

Productivity 1990-2012

Labour Rigidity and Productivity

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Temporary work in Italy and Oecd

10 11 12 13 14 15 16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2015 2016

Lavoro temporaneo, in % del totale dell'occupazione.

Italy OECD

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Deindustrialisation, wage stagnation (fig a) and wage share decline (fig b)

25000,0 30000,0 35000,0 40000,0 45000,0 50000,0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

20000,0 25000,0 30000,0 35000,0 40000,0 45000,0 50000,0 55000,0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

45 50 55 60 65 70

45 50 55 60 65 70 75

(fig a)

(fig b)

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+ Wage and + productivity

• Wage compression acts as a substitute for the adoption of technologically

advanced production processes (Sylos Labini, 1999; Pariboni and Tridico, 2017);

as a consequence, low wage countries tend to remain stuck in low-tech production segments (Storm and Naastepad, 2015).

• On the other hand, an increase in real wages might push firms which do not keep pace with technological innovations out of the market (Webb, 1912; Pasinetti, 1981).

• Moreover, in the face of exogenous changes in the income share accruing to

workers, entrepreneurs might want to defend their income share by attempting to enhance labour productivity and reduce labour unit costs (Hein and Tarassow, 2010).

• Marquetti (2004) performed an econometric analysis regarding the relation

between real wages and labour productivity in the US over a 130 year time span

and concluded that “real wages Granger-cause labor productivity…”

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4 model of transitions : share of total employment, 1993-2010

0,05 0,07 0,09 0,11 0,13 0,15 0,17 0,19 0,21 0,23 0,25

Italy Germany Sweden UK

0 0,01 0,02 0,03 0,04 0,05 0,06 0,07 0,08

0,01 0,015 0,02 0,025 0,03 0,035 0,04 0,045 0,05 0,055

0,15 0,2 0,25 0,3 0,35 0,4

(c) financial and insurance activities,

real estate activities (d) community, social and personal

services

(a) manufacturing (b) accommodation and food service

activities

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Italy vs Germany: where is the problem?

0,1 0,15 0,2 0,25 0,3 0,35

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Italy Germany

0,1 0,15 0,2 0,25 0,3 0,35

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Italy Germany

share of total employment share of total gross value added

Italian (mediterranean) model in a nutshell: Manufacture + food and accomomdation + lack of ICT investment

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Poor LP growth (left) and lack of ICT investment (right)

0 0,2 0,4 0,6 0,8 1 1,2

-0,2 -0,15 -0,1 -0,05 0 0,05 0,1 0,15 0,2

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Italy growth rate of lab prod Germany growth rate of lab prod Italy ICT hourly investment Germany ICT hourly investment

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Productivity and Investment

• Similarly to the manufacturing this figure suggests that the Italian service industries might also suffer from structurally poor investment dynamics

• Both ICT and total non-residential hourly investment have been mostly stagnating throughout the last couple of decades, while in Sweden, the

comparable magnitudes grew steadily, with some cyclical fluctuations in the

acquisition of ICT assets.

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-0,5 0 0,5 1 1,5 2 2,5

France Germany Italy United States Eu15 / Euro area

OECD Total

average 1990-2000 average 2001-10 Average 1990-2010

Productivity growth : 1990-2010

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Real hourly labour compensation

0 5 10 15 20 25 30 35 40 45 50

7 9 11 13 15 17 19 21 23 25

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 5

10 15 20 25 30 35 40

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

0 50 100 150 200 250 300 350

manufacturing wholesale and retail trade

accommodation and food services finance + real estate

business services remaining services

0 5 10 15 20 25 30

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

(d) UK, 2010 Pounds (c) Sweden, 2010 Kronas

(b) Germany, 2010 Euros

(b) Italy, 2010 Euros

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Share of temporary employees in total employees

0 0,05 0,1 0,15 0,2 0,25 0,3 0,35

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0

0,05 0,1 0,15 0,2 0,25

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0 0,1 0,2 0,3 0,4 0,5

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

manufacturing wholesale and retail trade

accommodation and food services finance + real estate + business services remaining services

0 0,02 0,04 0,06 0,08 0,1 0,12

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(c) Sweden

(d) UK

(b) Germany (a) Italy

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The models

• 𝑌

₁₉₇₀

−2015

= 𝛼 + 𝛽

₁

𝑀 − 𝛽

₂

𝑊𝑆𝑅 − 𝛽

₃

𝐴𝐹 − 𝛽

₄

𝐹𝑅𝐸 + 𝛽

₅

𝑃𝐵𝑆 + 𝛽

₆

𝐼𝐶 + 𝛽

₇

𝑅𝑆 + 𝛽

₈

𝐼 + 𝛽

₉

𝑊 + 𝜀

• 𝑌

₁₉₉₄

−2015

= 𝛼 + 𝛽

₁

𝑀 − 𝛽

₂

𝑊𝑆𝑅 − 𝛽

₃

𝐴𝐹 − 𝛽

₄

𝐹𝑅𝐸 + 𝛽

₅

𝑃𝐵𝑆 + 𝛽

₆

𝐼𝐶 +

𝛽

₇

𝑅𝑆 + 𝛽

₈

𝑊 − 𝛽

₉

𝑇𝑊 + 𝛽

₉

𝐸𝑃𝐿 + 𝛽

₁₀

𝐼𝐶𝑇 + 𝜀

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Main results

• Labour productivity is a positive function

• of the share of hours worked in the manufacturing sector and the advanced service sectors, such as the professional sector and business services (architecture, engineering services,

etc.),

• while it is a negative function of the share of hours worked in other service sub-sectors, such as food, restaurants, and

accommodations.

• Moreover, it is a positive function of wages and a positive function of investments, in particular in the ICT assets.

• Finally, it is a negative function of labour flexibility captured

by the variables temporary work and EPL

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GLS model, random effect. - Dep var: hourly labour productivity

Panel 1970-2015 Panel 1995-2015

sthwm 13.55841

(5.123227)**

22.77713 (8.897275)***

sthwwsr -9.984194

(9.341191)

-79.01002 (15.90175)*

sthwaf 2.562935

(11.78464)

-32.44724 (23.24004)

sthwfre -26.33085

(18.96174)

-48.97454 (33.30619)*

sthwpbs 73.42521

(8.162228)*

117.9447 (12.28364)*

sthwic -67.73225

(28.2348)**

203.8687 (57.81981)*

sthwrs 13.26419

(5.195353)**

19.71993 (9.654674)**

Tot_NR_Inv_2 .216437

(.1294167)***

RLCH_avg 1.211317

(.0405092)*

.3294595 (.0510691)*

ttw -.1312379

(.0274403)*

epl 2.542203

(.4842897)*

Ict inv 10.13182

(1.039787)*

R-sq: overall = 0.9446; Wald chi2(9) = 4401.17; Prob > chi2 = 0.0000;

Number of obs = 268; Number of groups = 9

R-sq: overall = 0.9463; Wald chi2(9) = 2133.38; Prob > chi2 = 0.0000; Number of obs = 133; Number of groups = 9

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• Labour Flexibility discourages innovation

• Low Wage and flex bring intensive labour investments

 Productivity decreases

• The Innovative State can not be in favor of job flexibility

• It can not be for low wages

 It promotes and makes innovation and therefore high salaries

The Enterpreneurial State / Innovator

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Competition in good market

Social security, welfare Minimum

income

“capital intensive”

investments and Redutction of working

hours Education training and active policies

New policy consensus: proposal

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Conclusions

• The econometric analysis confirms our hypothesis, in particular, hours worked in manufacturing and in the professional and business sectors and the information and communication sectors  + labour productivity, and hours worked in the wholesale and retail and financial and real estate sectors  -

• investment in the ICT  + while labour flexibility, (EPL ) and the share of temporary work  -

• similar results regarding labour flexibility, innovation and labour productivity: found by Kleinknecht (1998) and Tridico (2013). + employment turnover and a lack of stable industrial relations produce fewer incentives for firms to invest in innovation and in human capital, and therefore, to gain higher efficiency from workers.

• The enhancing role of wages on productivity is also confirmed, meaning that wages have a positive effect on productivity: Aggregate demand and increasing consumption are positive challenges for firms, which are

pushed to embark on capital intensive strategies when they are burdened by higher labour costs to satisfy the larger demand, which in turn, has a positive impact on labour productivity.

• Conversely, negative pressures on labour, such as flexibility and temporary work, have a detrimental effect on productivity for at least two reasons: 1) aggregate demand and consumption will decline, and following

Kaldor’s (1961) approach the incentives for productivity enhancing strategies will be lost; and 2) firms are inclined to exploit labour intensive investment strategies, which would place them on a lower technological frontier, with lower productivity gains and the prevalence of unskilled workers (Pasinetti, 1981; Sylos Labini, 1999).

• This trend is particularly likely to occur in the service sector, in which a national strategy that is state-

supported and technologically driven (following the Mazzucato (2013) approach) would thus be very useful.