EU-KLEMS project: Progress in Economic Underpinnings and Measurement Mary O’Mahony King’s College London and ESCOE Paper presented to the NTTS 2017 Satellite Event – Challenges in measuring productivity, growth and intangibles, Brussels, March 17 2017

The Productivity Puzzle – a widespread problem Labour productivity growth, % per annum Source: EU KLEMS and The Conference Board

Understanding the productivity puzzle: the theoretical and empirical framework Investigate from the production side From the perspective of producers (firms) Use of inputs and productivity in accounting for output changes Using a production function framework Focus on heterogeneous capital and labour Needs to go below aggregate economy level EU KLEMS provides industry accounts

The EU KLEMS project Funded by the fifth framework programme March 2008 data release: Estimates of gross output, intermediate input, value added, hours worked, capital (ICT and non-ICT), labour composition and total factor productivity 1970-2005 about 30 industries EU countries + US, Japan, Korea, Australia and Canada Subsequent updates: later time periods: to 2007, 2010 and now 2014 (for a limited set of countries), more industry detail on value added and hours worked, change to NACE rev 2… Linked to other countries through World KLEMS Update to 2015 (funded by DG ECFIN) will be released later this year and will include all EU-28

The EU KLEMS project Most data come from National Accounts Supplemented by other sources such as labour force and business surveys Some countries now produce their own KLEMS estimates (Belgium, Denmark, Finland, Italy, the Netherlands and the UK) Others experimenting (Ireland, Sweden….) But focus on value added measures Needs more on intermediate inputs – integration within a supply use framework The database has been used extensively in research and to inform policy examples include impacts of regulation, innovation and technology on productivity growth, determinants of innovation, wage inequality, skill biased technical progress and the decline in labour’s share, energy intensity and climate change, housing prices….

The EU KLEMS project: some recent results: Comparing 2007-14 with 1995-2007, the growth in labour productivity, capital per hour worked and TFP decline in many EU countries. Investment is important but not the whole story.

Large TFP declines in Manufacturing

Similar patterns across a range of service sectors: E. G Similar patterns across a range of service sectors: E.G. Wholesale and Retail trade

Similar patterns across a range of service sectors: Information and Communication

Financial Services: more mixed results. Affected by measurement issues?

PROFESSIONAL, SCIENTIFIC, TECHNICAL, not such an obvious decline in TFP growth. Likely severely affected by measurement issues

Conclusions Is the productivity puzzle due to: Long adjustment lags following the financial crisis (cyclical) Trend decline in productivity growth Answers require good quality, timely, internationally comparable, growth accounts The upcoming version of EU KLEMS (to 2015) will go some way towards providing an answer Further work is needed on the database Improvements in some measures of outputs and inputs, e.g. better deflators for services output Integration with other databases, especially intangibles and trade flow data Requires collaboration with NSIs but also informs them