Aggregate Labor Productivity Growth Research Articles

Structural Change and Labour Productivity Growth in India: A Sectoral Decomposition Analysis, 1980-2019

This paper aimed to trace the growth trajectory of labour productivity growth in India from 1980 to 2019. It evaluated economic growth and structural change. The study adopted decomposition techniques to comprehend how structural change influenced labour productivity. It enabled us to assess how different sectors were affected by reallocating labour inputs. A sub-period analysis was also done to analyse the effect of structural change across various sectors and study the contribution of sectors to aggregate labour productivity growth in India over different periods. Sectoral growth needs to be more consistent and balanced. The study concluded that India had benefited from the static structural change, that is, workers' movement to higher-productivity industries like manufacturing and construction. On the other hand, dynamic productivity gains, that is, the movements of workers to fast-growing industries that required very high productivity, were minimal or nonexistent. The services sector was predominantly responsible for the increase in value-added and output. It is challenging to sustain future developments without a strong manufacturing sector, mainly because of the slow rate of job creation in services, as it requires skills and expertise. Adequate policies facilitating the transfer of labourers from less productive to highly productive sectors are necessary to achieve growth-enhancing structural change.

Informality and aggregate labor productivity growth: Does ICT moderate the relationship?

This paper attempts to understand whether digitization, measured in terms of ICT capital and penetration of the internet, helps reduce the negative impact of informality on labor productivity growth, especially in emerging & developing countries. Informality is argued to be a drag on productivity growth in emerging & developing countries. We argue that increased use of digital technologies can help informal sector reduce transaction and coordination costs; enhance the linkages between the informal and formal sectors; facilitate the integration of the informal sector in the global value chain; and also increase the potential for the formalization of the economy in general - all of these are likely to contribute to aggregate productivity growth. Our econometric analysis using panel data for 118 countries from 1997-2017 provides some evidence of ICT capital deepening helping to reduce informality's negative impact on aggregate productivity growth. However, the moderating effect is modest compared to the magnitude of the negative impact of informality, indicating the need for a faster and more intense digitization efforts in emerging & developing economies. Moreover, investments in complementary factors including skills and infrastructure are imperative to fully unleash the potential of ICT in reducing the negative impact of informality.

Revisiting Baumol’s growth disease in Japan

This study analyzes the cause of secular stagnation in Japan after the economic bubble and its association with industrial structural change, specifically Baumol’s growth disease (BGD). Our analysis updates Nishi and focuses on the period between 1995 and 2018 using the latest version of the JIP (Japan Industrial Productivity) database. Then, we ask “Is Japan suffering from BGD?” Our approach includes decomposition of the aggregate labor productivity growth rate, fixed-share growth rate (FSGR) measurement, and a transition probability matrix. The decomposition reveals that the within-sector effect (WSE) is the main source of aggregate labor productivity. The reallocation growth effect (RGE), which measures BGD, was negative for both the short- and long-run averages of the post-1995 period. This period is different from the previous one, as the WSE declined significantly, and the considerable decline in the WSE can be seen as a major factor in Japan’s stagnation over the past 30 years. During this stagnation, BGD silently undermined the Japanese economy, albeit as a secondary effect. Furthermore, our FSGR and transition probability matrix show that persists and is infectious in Japan. Sectors that undergo BGD tend to persist in this state, and even when one sector is in a non-BGD state, it is more likely to develop BGD.

Structural change and productivity growth in Europe — Past, present and future

This paper studies the effect of structural change on the historical path of aggregate labor productivity growth for a large sample of European countries, and it builds a quantitative multi-sector growth model to analyze the potential impact that structural change may have on future productivity growth. We document that the observed reallocation of economic activity since the 1970s towards the service sector has exerted a strongly negative effect on aggregate productivity growth in most European countries. Moreover, we perform a quantitative analysis to show that the expected path of structural change might continue to have a sizeable dent on future productivity growth in Europe. By contrast, the impact in the U.S. is expected to rapidly diminish. We show that this differential result can be explained by the large expansion, in Europe, of certain service sub-sectors characterized by stagnant productivity.

The impact of new varieties on aggregate productivity growth*

AbstractAlthough there is an extensive body of literature on aggregate productivity growth, reallocation, and firm turnover, the contribution to overall productivity growth from new firms that produce new varieties is not well understood. In this paper, we propose a framework for aggregating productivity that identifies the contribution from new firms that produce new varieties. Our framework generalizes the frameworks currently used in the literature. To illustrate the decomposition, we analyse the case of firm turnover in Norway. We find that the net creation of new varieties due to firm turnover contributes about half a percentage point to annual aggregate labour productivity growth in the manufacturing sector.

Structural Reforms and Labor Productivity Growth in Developing Countries: Intra or Inter-Reallocation Channel?

Abstract This paper employs sectoral data to draw conclusions on how structural reforms—implemented during the period 1975–2005—affected differences in cross-country aggregate labor productivity growth in developing countries. Most important, it explores how the effects of reforms on productivity growth are distributed between the intrasectoral and intersectoral components of labor productivity growth. The findings indicate that most of the trade, product market, and financial sector reforms have increased productivity growth. Looking at the subcomponents of labor productivity growth, the results show that structural reforms work mainly through the intra-allocative efficiency channel but not through the interallocative efficiency channel. The intrasectoral component is the main driver of the impacts of reforms on productivity growth, with a contribution that ranges from 76 percent to 96 percent depending on the reform measure considered. The paper also examines the role of labor market regulations and finds that labor market rigidity/flexibility matters for how specific reforms induce reallocation of resources within and across sectors.

Structural Change and Productivity Growth in Europe - Past, Present and Future

This paper studies the effect of structural change on the historical path of aggregate labor productivity growth for a large sample of European countries, and it builds a quantitative multi-sector growth model to analyze the potential impact that structural change may have on future productivity growth. We document that the observed reallocation of economic activity since the 1970s towards the service sector has exerted a strongly negative effect on aggregate productivity growth in most European countries. Moreover, we perform a quantitative analysis to show that the expected path of structural change might continue to have a sizable dent on future productivity growth in Europe. By contrast, the impact in the U.S. is expected to rapidly diminish. We show that this differential result can be explained by the large expansion, in Europe, of certain service sub-sectors characterized by stagnant productivity.

Labor productivity growth in sub-Sahara African LDCs: sectoral contributions and macroeconomic factors

This paper has two objectives. The first is to identify sectoral contributions to labor productivity growth in thirty sub-Sahara African LDCs over 1991–2018. The second objective is to assess the strength of the relation between aggregate labor productivity growth and its sectoral components, and several factors that are said to promote economic growth. Our analysis provides weak evidence that global integration through trade benefits productivity growth within sectors or growth-enhancing structural transformation in the African LDCs. We find more signs that manufacturing and foreign direct investment associate with labor productivity growth and its components at both aggregate and sectoral level. Exporters of minerals are the exception. For these countries a significant but negative estimate for foreign direct investment emerges.

Competition, Technological Change and Productivity Gains: A Sectoral Analysis

The empirical relationship between competition intensity and the rate of productivity growth across 30 sectors of the French economy between 1978 and 2015 displays an inverted U-shape. This implies that there exists an optimal level of competition for each sector, defined by the price markup that maximises the growth rate of hourly labour productivity. As there is a significant and strong positive correlation between optimal markups and technical progress rates in each sector, it follows that sectors with high technical progress require higher markups to maximise their labour productivity growth rate. The persistence of non-optimal markups in French sectors is associated with a 0.4% loss in aggregate annual labour productivity growth during the period (1.86%). French long-term productivity growth could have reached 2.25% had markups been at their optimal level. As a result, policies to foster innovation and productivity should aim at enabling the optimal level of markup (or market power), particularly in high-innovation sectors.

Structural change and economic growth in India

Using detailed sectoral data from India KLEMS, we analyze the role of structural change in determining India's aggregate productivity growth during 1980–2011. In general, the impact of static structural change on aggregate labor productivity growth has been positive, as workers moved to sectors of a relatively higher labor productivity level. However, dynamic reallocation effects—worker movement to fast-growing industries—have not been observed. The pro-market reforms in the 1990s did help a TFP growth-enhancing allocation of capital across sectors. The relative importance of the manufacturing sector for aggregate TFP growth has increased in recent years. Yet, India's structural transformation features the absorption of workers in the construction sector and slow and stagnant job creation respectively in services and manufacturing sectors. This poses a challenge, as the potential for productivity growth in construction and services are limited, and the changing nature of manufacturing production provides less room for absorbing less-skilled workers.

Structural Change, Expanding Informality and Labor Productivity Growth in Russia

Strong growth, intensive structural change, and expanding informality have characterized many developing and emerging economies in recent decades. Yet most empirical investigations into the relationship between structural change and productivity growth overlook informality. This paper includes the informal sector in an analysis of the effects of structural changes in the Russian economy on aggregate labor productivity growth. Using a newly developed dataset for 34 industries covering the period 1995–2012 and applying three alternative approaches, aggregate labor productivity growth is decomposed into intra‐industry and inter‐industry contributions. All three approaches show that the overall contribution of structural change is growth enhancing, significant, and decreasing over time. Labor reallocation from the formal sector to the informal sector tends to reduce growth through the extension of informal activities with low productivity levels. Sectoral labor reallocation effects are found to be highly sensitive to the methods applied.

Structural transformation in emerging economies: leading sectors and the balanced growth hypothesis

ABSTRACTThe paper uses the World Input-Output Database to address patterns of structural transformation in BRIC countries, Indonesia, South Korea, Mexico and Turkey. Sectoral drivers of aggregate labour productivity growth, and the relative importance of within-sector versus employment reallocation effects on aggregate labour productivity growth, are evaluated using growth accounting decomposition methods. Decomposition results are used to assess how patterns of structural transformation relate to macroeconomic performance in terms of aggregate labour productivity, output and employment growth. Together with the construction of ‘Hirschman compliance indices’, decomposition results are also used to shed light on the balanced versus unbalanced growth debates. The paper goes on to assess the extent of complementarities between manufacturing and information and communications technology-intensive advanced services through intermediate inputs, comparing the eight emerging countries with G7 countries over time.

Testing the Governance-Productivity Nexus for Emerging Asian Countries

This paper presents panel data estimates of the relationship between governance, aggregate labor productivity (ALP) growth and total factor productivity (TFP) growth for 12 Asian economies between 1996 and 2013. Our results show that government effectiveness has a positive and significant effect on ALP in both levels and first differences. Regulatory quality has a positive impact on ALP only in first difference. Although both government effectiveness and regulatory quality have a positive effect on TFP growth in first difference, only political stability is significant and positive in the levels specification. Other findings indicate that physical capital and human capital have a positive effect on ALP growth. We also find evidence of positive spillover effects with respect to human capital. The positive association between governance, economic growth and productivity provide a better understanding of the role of governance in enhancing economic performance. Our findings have policy implications for ways to achieve good governance to enhance economic growth and productivity.

Sources of Productivity Growth Dynamics: Is Japan Suffering From Baumol's Growth Disease?

This study examines the sources of labor productivity growth dynamics in Japan (1970–2010) and investigates the extent to which Japanese economic performance has been affected by Baumol's growth disease (BGD). We find that BGD silently undermines Japanese economic growth. However, the magnitude is miniscule, and consequently the aggregate labor productivity growth rate has not been decreasing monotonically. We also explore how BGD is arising and why it is small in the Japanese economy. BGD is weak because (1) the positive Baumol growth effect is also working in certain services sectors and (2) BGD is not a durable phenomenon: even if a sector begins to suffer from BGD, it is likely to recover quickly.

Sources of long run economic growth in Russia before and after the global financial crisis

Abstract Although productivity decline in the global economy was observed before 2008, the global financial crisis of 2008 stimulated study of its source. In this context, recent literature mentions inefficient investments in machinery, human capital, and organizational processes. This can include skill mismatch and the lack of technology diffusion from advanced to emerging industries and firms. To what extent is this global view helpful in understanding recent productivity decline in the Russian economy? The present study reports that at least some of these sources can be observed in Russia as well. Using conventional industry growth accounting, it compares pre- and post-crisis sources of growth for the Russian economy. Specifically, it presents aggregate labor productivity growth as the sum of capital intensity and total factor productivity (TFP) growth in industries, and the contribution of labor reallocation between industries. It shows that the stagnation of 2008–2014 is more the result of the TFP decline and the deterioration of the allocation of labor than the lack of capital input. Moreover, the TFP decline started in Russia a few years before the crisis, as it did in major global economies, such as the United States, OECD countries, China, and Brazil. At the same time, relatively stable capital intensity made the Russian pattern to some degree similar to resource abundant Australia and Canada. Furthermore, the contribution of information and communications technology capital to labor productivity growth in Russia declined after 2008, which could have also hampered technology diffusion. Finally, the structure of the flow of capital services in Russia changed after 2008. Before the crisis, the contribution of machinery and equipment dominated, while after the crisis, construction provided the lion's share of capital input.

Deindustrialization? A Global Perspective

Recent studies show that, within countries, manufacturing labor productivity growth has outstripped aggregate labor productivity growth, putting significant downwards pressure on national manufacturing employment shares. We compile the first (nearly) global database of national manufacturing employment and output levels over time, and use it to document two facts seemingly at odds with these results: (1) the manufacturing sector’s share of global employment did not fall between 1970 and 2010; and (2) manufacturing and aggregate labor productivity at the global level grew at roughly the same rate. We show that this occurred because rapid within-country manufacturing productivity growth was counterbalanced by an equally rapid shift of manufacturing jobs towards lower productivity economies.

Sources of Long Run Economic Growth of the Russian Economy Before and after the Global Financial Crisis

Although a productivity slowdown of the global economy was observed before 2008, it was the 2008 crisis that stimulated studies on its origins. Recent literature suggests inefficient investments in machinery, human capital and organizational processes. This includes skill mismatches and a lack of technology diffusion from advanced to laggard industries and firms. To what extent is this global view helpful in understanding recent productivity slowdown of the Russian economy? The present study reports that at least some of these origins can be observed in Russia. Using conventional industry growth accounting, it compares the pre- and post-crisis sources of growth in the Russian economy. Specifically, it represents aggregate labour productivity growth as the sum of capital deepening and total factor productivity (TFP) growth in industries, and the contribution of labour reallocation between industries. It shows that the stagnation of 2008-2014 is more an outcome of the TFP slowdown and a deterioration of the allocation of labour rather than a lack of capital inputs. The TFP slowdown started in Russia a few years before the crisis, as in other major global economies, such as OECD countries, China and Brazil. Russia demonstrated relatively stable capital deepening makes the Russian pattern similar to resource abundant Australia and Canada. Next, the contribution of information and communication capital to labour productivity growth in Russia after 2008 declined, which could have hampered technology diffusion. Finally the structure of the flow of capital services in Russia changed after 2008. Before the crisis the contribution of machinery and equipment dominated, while after the crisis construction provided the most capital inputs.

China's economic growth and convergence

AbstractUsing cross‐country panel data, this study identifies and discusses major factors contributing to China's strong growth in the past four decades. China's low initial per capita income relative to its own long‐run potential, combined with sound policy factors including a high investment rate, strong human capital, high trade openness and improved institutions, enabled the economy to converge with advanced economies in terms of income level. The shift‐share analysis with industry‐level data shows that strong labour productivity growth in the manufacturing sector largely contributed to China's overall labour productivity growth. Although labour reallocation from agriculture to the services sector made a positive contribution to aggregate labour productivity growth, labour productivity growth in the services sector itself was negative over the 1980–2010 period. China's average potential GDP growth is predicted to decline significantly in the coming decade, to 5%–6% and fall further to 3%–4%—due to the convergence effect and structural problems—unless China substantially upgrades its institutions and policy factors and improves productivity, particularly in its services sector.

Industrial structure change and economic growth: A China-Russia comparison

This paper examines the sources of economic growth and the nature of industrial structure change in China over the past decade, with a comparison to those in Russia. It shows that over the observation period between 1995 and 2008, the Chinese economy was concentrated relatively more in the manufacturing sector and relatively less in the service sector than the Russian economy. In addition, this paper finds that the higher economic growth rate in real GDP and aggregate labour productivity growth between 1996 and 2008 in China than in Russia was broadly based, with most industries contributing to China's better performance. Furthermore, it reveals that the acceleration in economic growth in China in 2003–2008 over 1996–2002 was mainly traced to an increased contribution from the manufacturing sector and to a lesser degree the service sector, while in Russia, it was the service sector, followed by the primary sector driven by the mining and oil and gas extraction industry. These results suggest that the Chinese and Russian economies complement each other, which bodes well for further economic cooperation and trade between the two countries.

Declining Dynamism, Allocative Efficiency, and the Productivity Slowdown

A large literature documents declining measures of business dynamism including high-growth young firm activity and job reallocation. A distinct literature describes a slowdown in the pace of aggregate labor productivity growth. We relate these patterns by studying changes in productivity growth from the late 1990s to the mid 2000s using firm-level data. We find that diminished allocative efficiency gains can account for the productivity slowdown in a manner that interacts with the within-firm productivity growth distribution. The evidence suggests that the decline in dynamism is reason for concern and sheds light on debates about the causes of slowing productivity growth.