1. Productivity, growth potential and monetary policy in EMU Is there a change in trend growth? (EU Monitor 42, 18.12.2006) Demidov A. Klischenkova N. Kulygina T. Kupriyanovich O.

2. CONTENTS General data and facts Productivity definition History of productivity differences Labour productivity growth in the euro area and the US Reasons for a lower productivity and GDP growth in EMU The analysis of the growth potential GDP growth and ECB interest rates The main features of the present situation in the euro area

3. General data and facts Hourly labour productivity in 2005 was 9.1% lower in the euro area than in the USHourly labour productivity in 2005 was 9.1% lower in the euro area than in the US The GDP growth in the euro area will not be raised significantly - between 2% and 2.5%The GDP growth in the euro area will not be raised significantly - between 2% and 2.5% The increase in euro area GDP growth and productivity this year is unlikely to reflect more than a cyclical reboundThe increase in euro area GDP growth and productivity this year is unlikely to reflect more than a cyclical rebound

4. Productivity definition Productivity (labour productivity) gain - key factor driving long term economic growth and increases in living standards:Productivity (labour productivity) gain - key factor driving long term economic growth and increases in living standards: real GDP per hour worked real GDP per hour worked real GDP per worker real GDP per worker real GDP per unit of physical capital employed real GDP per unit of physical capital employed GDP =GDP = GDP can be raised byGDP can be raised by –boosting labour productivity –working more hours per employee –raising the participation rate –increasing the total population GDP. hours. employees hour employee population population · population

5. History of productivity differences Over the past 10 years productivity has risen by 13.2% in EMU, but 25.8% in the USA Over the past 10 years productivity has risen by 13.2% in EMU, but 25.8% in the USA

6. Labour productivity growth in the euro area and the US Sources: ECB calculations based on data from the Groningen Growth and Development Centre and the Conference Board (Total Economy Database, May 2006)Sources: ECB calculations based on data from the Groningen Growth and Development Centre and the Conference Board (Total Economy Database, May 2006)

7. Reasons for a lower productivity and GDP growth in EMU Permanent reduction of hours worked per employee in the euro area since 1970 and the growth of hours per employee in the US in the late 1990sPermanent reduction of hours worked per employee in the euro area since 1970 and the growth of hours per employee in the US in the late 1990s Almost constant rise of employment rate in the USA between 1970- late1990 and flat rates in EMUAlmost constant rise of employment rate in the USA between 1970- late1990 and flat rates in EMU Lower investment in ICT (Information Society Technologies) in the euro area compared with the USLower investment in ICT (Information Society Technologies) in the euro area compared with the US Higher utilization of lower skilled workersHigher utilization of lower skilled workers

8. The analysis of the growth potential GDP can be split into labour input and labour productivityGDP can be split into labour input and labour productivity 1.Labour input is determined by population growth, labour participation rates and hours per employee: population growth in the euro area is very low (over the past three years the population has grown by 0,2 %) population growth in the euro area is very low (over the past three years the population has grown by 0,2 %) there are some success in raising employment rate there are some success in raising employment rate hours worked per employee have declined in recent years – there is a trend towards part-time employment hours worked per employee have declined in recent years – there is a trend towards part-time employment

9. The analysis of the growth potential Labour productivity is determined by: 2. Labour productivity is determined by: Education (almost all countries in the euro area have seen stagnation in the education sectors, in particularly, Germany) Education (almost all countries in the euro area have seen stagnation in the education sectors, in particularly, Germany) Competition (easy entry of foreign productive companies leads to an increase of productivity of domestic ones) Competition (easy entry of foreign productive companies leads to an increase of productivity of domestic ones) Innovation (few countries spend 3 % of GDP on research and development) Innovation (few countries spend 3 % of GDP on research and development)

10. GDP growth and ECB interest rates if productivity growth declines, then GDP growth declines as wellif productivity growth declines, then GDP growth declines as well companies pass the labour costs on to consumers, thereby creating higher CPI inflation ratescompanies pass the labour costs on to consumers, thereby creating higher CPI inflation rates the central bank increases its interest rates to keep inflationthe central bank increases its interest rates to keep inflation

11. The main features of the present situation in the euro area Many companies cut wages more than it is necessary to keep inflation and profit rates. The result is: profits rise inflation falls GDP growth slows