1. Services productivity growth in Australia, Europe and US Robert Inklaar Groningen Growth and Development Centre, University of Groningen and The Conference Board with Bart van Ark and Marcel Timmer

2. Background: analysis  Different growth pattern since 1995  US, Australia faster GDP growth  Europe has slowed down  Mainly diverging productivity growth  But where is it coming from?  Need industry data  Productivity growth and levels  Investment in new technology (ICT)

3. Background: data  Results based on preliminary version of EUKLEMS database  Full industry productivity database; growth & levels; 1970-2004; 30-70 industries; Europe, US, and others  Big EU-funded project  15 institutions, GGDC leading  15 March 2007 first public release  See www.euklems.net for details  Australia will be added later  Current results prepared for Economic Policy

4. Main findings  Productivity growth accelerated after 1995 in Anglo-Saxon countries  Market services main source of strength  Growth in Europe slowed down, in particular in services  ICT investment & complementary intangibles explain part  Competition and regulation further candidates

5. Surge in services productivity growth main post-1995 story

6. First suspect: ICT investment  Perform industry growth accounting exercise: Labour productivity growth ICT capital deepening Non-ICT capital deepening TFP growth Labour composition change

7. ICT is part of the story

8. But ICT may be more important  General purpose technology => complementary investments  For ICT mostly intangible, time-consuming  mismeasured in National Accounts?  Firm research & case studies find support  So far less from industry-level  Follow method of Brynjolfsson & Hitt (2003, REStat)

9. Main idea: increase time horizon

10. Long-term effect of ICT is twice as large as short-term effect

11. Robustness checks (1)  Works only for relatively measured industries  Excludes finance, business services  Other production function specifications (more general)  Show even higher returns (even short-term excess returns)  All show upward trend in coefficients  All show excess returns in the long-run

12. Robustness results (1)

13. Robustness checks (2)  Baseline removes country/year effects  Adding country/industry dummies removes effect => but this removes cross-industry, which is used in identification  Baseline is weighted least squares  Uses industry value added, but gross output or employment shows same results  OLS also very similar, but pattern of coefficients less smooth  Overall: fairly robust results

14. Robustness results (2)

15. Interpretation: intangible investment  Can’t just be random measurement error => would not cause ‘overshooting’  Could be ‘spillovers’, but mostly anecdotal evidence  Most likely the effect of intangible investments => misclassified as expenditures

16. However: this does not close the gap  Larger long-term effect of ICT is found in all countries*  Even effect in US is the same  ICT-related intangible investment then explains only part (0.4%)  So what about convergence to frontier? * This does not yet include Australia: need the KLEMS data for that

17. Convergence in only the minority of countries for total services

18. But convergence is an industry story

19. So what does this mean?  Convergence is happening, even in services  But not everywhere  Nicoletti & Scarpetta (’03): convergence depends on regulation  Confirmed here: more regulation => less convergence (correlation -0.6)

20. Competition is key (probably)  Regulation story is complex  Regulatory burden can be very industry-specific (retail case study)  Competition is about more than regulation  e.g. need robust competition authority  But still the most plausible explanation for productivity growth differences

21. Erwin’s Enquiries  Does not include land and inventories  Uses an internal rate of return  Assumes equal av. wage of self- employed as employees  Has a zero floor of user cost and capital share