IBM Chair, Labour Market Course November, Milan

IBM Chair, Labour Market Course 20-24 November, Milan
The role of policies and institutions for good labour market performance IBM Chair, Labour Market Course 20-24 November, Milan Stefano Scarpetta Deputy Director for Employment, Labour and Social Affairs

Overview of the course Lecture 1 (Tuesday): Economic growth and labour market Economic growth across countries and over time The role of labour market for promoting economic growth and the distribution of its benefits From an aggregate to a sectoral and firm-level perspective: the importance of labour reallocation for productivity and output growth Lecture 2 (Wednesday): The role of policies and institutions for structural labour market outcomes Key policy and institutions affecting labour market outcomes A model and an empirical analysis to assess the role of policy and institutions for LM outcomes and their interactions Lecture 3 (Thursday): The role of structural policies and institutions for labour market resilience and resource allocation The role of policy and institutions for LM resilience From a static to dynamics analysis of the labour market: job and worker flows,, effects on productivity and workers Stefano Scarpetta, IBM Chair, Labour Market Course

Course objectives Familiarise students with the role of policies and institutions for good labour market performance over the business cycle Show how simple descriptive statistics and econometric analysis can be used to provide evidence-based policy assessments Show what can be learnt from making cross- country comparisons Stefano Scarpetta, IBM Chair, Labour Market Course

What is the OECD? Born out of the Organisation for European Economic Cooperation (OEEC) which was set up after WWII to coordinate the Marshall plan Transformed into Organisation for Economic Cooperation and Development (OECD) in 1961 to promote policies for development (16 EUR, CAN + USA) Provides a forum in which governments work together to share experiences and seek solutions to common problems Benchmarking (construction of comparable data), analysis & policy advice Stefano Scarpetta, IBM Chair, Labour Market Course

From “rich-men’s club” to organisation with increasingly global reach
Currently 34 full member countries, incl. CHL, MEX & TUR Russia in accession process Enhanced engagement with major emerging economies: BRA, CHN, IDN & IND Working relationships with over 70 developing and transition economies Policies to promote economic (“green growth”); boost employment ; raise living standards (“better lives initiative”); maintain financial stability; econ. dev. in other countries Stefano Scarpetta, IBM Chair, Labour Market Course

Lecture 1: Economic growth and the labour market
Economic growth across countries and over time The role of labour market for promoting economic growth and the distribution of its benefits The role of labour reallocation for productivity and output growth Stefano Scarpetta, IBM Chair, Labour Market Course

Stylized facts Large cross-country differences in income per capita and output per worker Globally, these differences tend to persist over time (even though subsets of countries did converge) Overall cross-country dispersion or inequality has increased over time Distribution tends to be bi-modal or even tri-modal But the dispersion has actually declined if population size is taken into account (China, India) Note in 2007 GDP pc: USA 35000$ CHN 9000$ times IND 4000$ times COG 4000$ NGA 2500$ times ZAR 400$ almost 100 times Note 10-fold difference between COG and ZAR two neighbouring countries with same geography, culture, history, resources Stefano Scarpetta, IBM Chair, Labour Market Course

Stylized facts Differences in incomes p.c. reflect starting conditions and, especially, differences in GDP p.c. growth rates Very small differences in growth rates for long periods of time can have dramatic implications for income p.c. levels In fact economic historians agree that most of current differences in levels depend on differences in growth rates over past 2 centuries And despite large differences in starting conditions after the 2nd WW sustained growth rates have allowed convergence in levels for most founding OECD countries and even for some non-OECD African and Asian countries Still, globally there are large cross-country differences in growth rates, and globally these have tended to become larger Ask why are there such large differences? Consider two countries that have same initial GDP p.c. and grow for 50 years, one at 2% per year and the other one at 2.5% per year. The first will end up with GDP p.c. 2.5 times higher, the second with GDP p.c. 3.5 times higher. Stefano Scarpetta, IBM Chair, Labour Market Course

Useful concepts here are absolute, conditional and club convergence
Stylized facts Given cross-country differences in income levels and growth rates key issue is that of convergence Are growth patterns such that there is convergence in income p.c. levels? If so, is this a generalised phenomenon or is it limited to clubs of countries? Useful concepts here are absolute, conditional and club convergence Stefano Scarpetta, IBM Chair, Labour Market Course

Growth trajectories and convergence (1870-2000) (logs GDP per capita)
USA and selected OECD USA and BRICs Leader Note: 2% average an stable growth rate for the US over most of 130 years remarkable convergence of OECD countries no convergence of emerging countries for very long time Stefano Scarpetta, IBM Chair, Labour Market Course Source: Maddison (2003), data 1990 US$ PPPs

Convergence patterns and clubs (1962-2008)
Stefano Scarpetta, IBM Chair, Labour Market Course

OECD 1970-1994: A Convergence Club
Convergence zone Divergence zone Stefano Scarpetta, IBM Chair, Labour Market Course

OECD convergence 1995-2006 Convergence zone Divergence zone
Note that a number of continental EU countries have diverged over this second period Divergence zone Stefano Scarpetta, IBM Chair, Labour Market Course

Determinants of GDP p.c. An overview
GDP per capita Labour productivity (output per hour worked) Labour utilisation (hours worked per capita) GDP per capita Labour productivity (output per hour worked) Labour utilisation (hours worked per capita) Hours worked per worker Capital deepening (capital per hour worked) Multi - factor productivity Structural unemployment rate Labour force participation Quality of capital (vintage and asset composition ) labour (skill mix Pure technical progress Employment rate GDP per capita Labour productivity (output per hour worked) Labour utilisation (hours worked per capita) Capital deepening (capital per hour worked) Multi - factor productivity Quality of capital (vintage and asset composition ) labour (skill mix Pure technical progress Working harder vs working smarter. Allocation process Industries Industries Firms Firms Stefano Scarpetta, IBM Chair, Labour Market Course

Growth decompositions
Simple decompositions of GDP p.c. (GDPpc): Can also be expressed relative to benchmark country (0) : Stefano Scarpetta, IBM Chair, Labour Market Course

Growth decompositions
Decomposition are mechanical but help to e.g.: highlight proximate sources of cross-country differences in GDP (productivity, hours worked, unemployment, participation and demographics) perform simple projections/simulations of future GDP scenarios (e.g. economic baseline for models), with assumptions/projections for each of the elements Stefano Scarpetta, IBM Chair, Labour Market Course

Gap in labour utilisation
Cross-country differences in GDP per capita GDP and productivity levels in US$ PPP, 2007 Percentage gaps with respect to United States Gap in labour utilisation Gap in GDP per capita = Gap in GDP per hour worked + Ask what do you see from this picture? What is the main source of GDP p.c. differences? Stefano Scarpetta, IBM Chair, Labour Market Course

Simple growth decomposition
A similar simple decomposition can of course be done for GDPpc growth rates (denoted with a hat): where the cross term(s) can usually be ignored (and, hence, the ln operator can be used to derive growth rates). The next figures show that the main driver of growth is labour productivity. Stefano Scarpetta, IBM Chair, Labour Market Course

What drives cross-country differences in GDP per capita growth ?
Total economy, percentage change at annual rate, Growth in labour utilisation Growth in GDP per capita = Growth in GDP per hour worked + Mise à jour le 26 juin 2009 (donnée Martine) Ask why couldn’t employment be a driver of long-run growth? Stefano Scarpetta, IBM Chair, Labour Market Course

Labour market performance before the crisis
In 2007, the ER reached record high (67%) and the UR stood at a 25 year low (5.6%). A supportive macro-economic environment Structural reforms in product and labour markets Increased labour force participation of women and older workers By 2007, the key policy priority had shifted from combating UR to removing barriers to LFP Limit the adverse consequences of population ageing Alleviate skill shortages Stefano Scarpetta, IBM Chair, Labour Market Course

Labour market performance differs across countries… Employment rates in OECD countries (%), In 2007, just before the crisis, LM performance was good as it has had ever been. The share of the working-age population in employment peaked at almost 67%, the highest level in the history of the OECD, while the unemployment rate stood at a 25 year low. This was the result of a number of factors: i) a supportive macro-economic environment; ii) structural reforms in product and labour markets; iii) the increase in labour market participation of different socio-economic groups of women and older workers. However, employment rates continue to differ markedly across countries. In Italy, Hungary, Poland and Turkey employment rates remain below 60%, while they exceed 75% in some Nordic countries, New Zealand and Switzerland. Differences in labour market policies are likely to account for a substantial part of these differences. Indeed, there exist large cross-country differences in labour market settings and countries that showed better labour market performance during the last decade tended to have been more active in making structural reforms than those that those that did not. While in the early 1990s the key policy priority was unemployment, and particularly the problem of long-term unemployment, by removing barriers to labour force participation had become the key priority to alleviate skill shortages and limit the adverse consequences of population ageing. Stefano Scarpetta, IBM Chair, Labour Market Course

Large hike in unemployment rates, 2007 Q4 to 2011 Q3
Unemployment rate before the crisis, at its peak and its latest value* in percentage of total labour force, quarterly data Countries are shown in ascending order by the unemployment rate at its peak. * Trough (peak) dates are defined as the start of the longest spell of consecutive increase (decrease) of the quarterly OECD harmonised unemployment rates since 2006 Q1. Source: OECD calculations based on OECD Main Economic Indicators Database. Stefano Scarpetta, IBM Chair, Labour Market Course

Youth have been hit especially hard during the crisis
Youth (15-24/16-24) unemployment rate before the crisis, at its peak and its latest value* in percentage of youth labour force, quarterly data Countries are shown in ascending order by the youth unemployment rate at its peak. * Trough (peak) dates are defined as the start of the longest spell of consecutive increase (decrease) of the quarterly OECD harmonised unemployment rates since 2006 Q1. Source: OECD calculations based on the Short-term indicators from Eurostat and national labour force surveys. Stefano Scarpetta, IBM Chair, Labour Market Course

Percent of the population
Sources of gaps in labour utilisation: Employment rate by socio-economic group Percent of the population Stefano Scarpetta, IBM Chair, Labour Market Course

Quality of jobs Temporary employment, 1996 and 2006
Percent of salaried employment Stefano Scarpetta, IBM Chair, Labour Market Course

Quality of jobs Part-time employment
Percent of total employment Stefano Scarpetta, IBM Chair, Labour Market Course

Quality of jobs Reasons for part-time employment, 2006

An ageing population: Older workers in total population
Percent Stefano Scarpetta, IBM Chair, Labour Market Course

An ageing population: Inactive over the total active population at 2000 participation rates

Significant differences in the level of human capital across countries and over time

Human capital plays a significant role in boosting labour productivity…
What year/period is this? Stefano Scarpetta, IBM Chair, Labour Market Course

…but skill-biased employment rates

Heterogeneity of productivity developments and resource reallocation
Aggregate productivity levels mask large differences in productivity levels across industries and, within industries, across firms. Similarly, aggregate productivity growth reflects widely heterogeneous developments in productivity at the industry and firm level as well as reallocation of resources across them. Differences in heterogeneity and reallocation processes contribute to explain cross-country differences in productivity growth. Stefano Scarpetta, IBM Chair, Labour Market Course

Two related questions are of interest:
Heterogeneity and reallocation Sector-level decompositions of aggregate productivity growth Two related questions are of interest: How much does each sector (or group of sectors) contribute to aggregate productivity growth? What are the relative contributions of within sector growth and changes in sector composition to aggregate productivity growth? Stefano Scarpetta, IBM Chair, Labour Market Course

Shift-share decomposition
Heterogeneity and reallocation Sector-level decompositions of aggregate productivity growth Shift-share decomposition Changes in aggregate labour productivity reflect changes in productivity within each sector of the economy and shifts in its sectoral composition. Therefore, aggregate productivity growth can be accounted for in terms of sectoral contributions and intersectoral reallocation of resources. Such accounting can be done using so-called shift-share analysis. Stefano Scarpetta, IBM Chair, Labour Market Course

Heterogeneity and reallocation Sector-level decompositions of aggregate productivity growth Shift-share decomposition Suppose you want to decompose changes in an aggregate variable X relative to its level in a base year X0 into the two components (within each sector k and between sectors). We start from the identity: where sk is the share of sector k (measured in terms of employment in the case of labour productivity). Stefano Scarpetta, IBM Chair, Labour Market Course

Heterogeneity and reallocation Sector-level decompositions of aggregate productivity growth Shift-share decomposition Adding and subtracting the sums of each of the cross-products , and the own product , we get the shift share decomposition: where ΔX accounts for the within sector change, Δs accounts for the shift in sectoral composition (between effect) and the last is an interaction term, which can be interpreted loosely as an indicator of covariance: if it is positive, within and between effects act in the same direction. Stefano Scarpetta, IBM Chair, Labour Market Course

Heterogeneity and reallocation Sector-level decompositions of aggregate productivity growth Shift-share decomposition In growth terms, if X is productivity (i.e. Y/L) one divides both sides by X0 to obtain: where y is the sectoral share of output in aggregate output Y and s is the sectoral share of labour in aggregate labour input L. Here the first term provides the within sector contribution to aggregate productivity growth and the second term indicates that the contribution of sectoral shifts depends on the ratio of sectoral to average productivity. Most of the changes in productivity over the periods considered originate in within industry efficiency improvements. But between effects can be important in some countries. Stefano Scarpetta, IBM Chair, Labour Market Course

Shift and Share, all industries, 1994-2004

Shift and Share, services industries, 1994-2004

Shift and Share, manufacturing industries, 1994-2004

Heterogeneity and reallocation within-industry heterogeneity and aggregate productivity growth
There is a growing evidence that the population of firms undergo significant changes over time, both through resource reallocation between existing firms and the process of firm entry and exit. The study of productivity, the role of within-firm productivity growth vs. the productivity growth induced by the reallocation of resources has been the focus of much recent research (see, e.g., Olley and Pakes (1996), Griliches and Regev (1995) and Foster, Haltiwanger and Krizan (2001,2002) Bartelsman, Haltiwanger, and Scarpetta (2004), Syverson (2004), Foster, Haltiwanger and Syverson (2008)). The impact of changing patterns of international trade on an economy is increasingly viewed through these lenses, with evolving trade relations changing the market structure and mix of businesses (e.g. Helpman, Melitz, and Yeaple, 2004). Substantial churning of firms, along with the reallocation of labor across continuing firms, implies that workers and firms incur in significant search and other adjustment costs (see, e.g., Mortensen and Pissarides, 1999; and Caballero and Hammour, 2000). As such, the efficiency of an economy in dealing with such reallocation is important not only for the productivity dynamics of the economy, but also for the dynamics of the labor market and in particular of unemployment. For all of these reasons, firm-level dynamics appear to be crucial for the relative success all market economies Stefano Scarpetta, IBM Chair, Labour Market Course

Firms heterogeneity: stylized facts
Size and growth: The probability of survival tends to increase with firm size; but, conditional on survival, the proportional rate of growth of a firm is decreasing in size (see Evans 1987a, 1987b; Dunne et al. 1988, 1989). The firm life cycle: For any given size of firm, the proportional rate of growth is smaller the older the firm, but its survival probability is greater (see Foster et al ; and International Journal of Industrial Organization, 1995). Shakeouts: The number of producers in a given market tends first to rise to a peak, and later to fall to some lower level. (Klepper and Graddy, 1990; Klepper and Simons, 1993; Geroski, 1995). Churning: There is a high pace of the reallocation of outputs and inputs across businesses (e.g. Geroski, 1995, Ahn, 2000 and Davis and Haltiwanger, 1999 for surveys of the literature). Reallocation and Productivity: In well‑developed market economies, the evidence is overwhelming that the pattern of reallocation is productivity enhancing. (see e.g. Olley and Pakes, 1996, Griliches and Regev, 1995, and Foster, Haltiwanger and Krizan, 2001, 2002). Stefano Scarpetta, IBM Chair, Labour Market Course

Theoretical models of firm heterogeneity
Several theories have been developed to explain these observed patterns of firm dynamics survival and growth. They generally relate to the process of ‘creative destruction’ (usually ascribed to Joseph Schumpeter). 1) and 2) are consistent with the passive learning models (Jovanovic, 1982): new entrants do not know their potential profitability. Learning leads new firms to expand, contract or exit the market. Cabral (1995 and 2003) assumes that firms must incur a sunk cost in building production capacity. Since small entrants have a higher probability of exit than large firms, it is optimal for them to invest more gradually, and thus experience higher growth rates if successful, than larger entrants. Shakeouts (3) is consistent with Jovanovic and MacDonald (1994) who argue that over time a new technology emerges which offers low unit costs but higher level of output per firm. The transition to the new technology involves a shakeout of first generation firms. Churning (4) is consistent with active learning models (Ericson and Pakes, 1995): here firms explore actively and invests to enhance profitability under competitive pressure; they grow if successful, shrink or exit if unsuccessful. Stefano Scarpetta, IBM Chair, Labour Market Course

Wide firm heterogeneity in productivity levels within industries
Units: Thousand US$ per worker Stefano Scarpetta, IBM Chair, Labour Market Course

Productivity dispersion across firms in ICT-producing
Wide firm heterogeneity within industries (2) Productivity dispersion across firms in ICT-producing France Electrical and optical equipment Telecommunications 95th %ile Much of the increase in dispersion comes from top performers. 75th %ile 25th %ile 5th %ile High dispersion Increasing dispersion after liberalization Increase comes from top performers The figures present the distribution of labour productivity in each industry and year between the 5th and 95th percentiles. The upper bound of the grey bar represent the 75th percentile, the lower bound the 25th percentile and the line in the middle of each grey bar being the median. Labour productivity is measured as value added per worker in 100 thousands of 1995 Euros. Source: Authors’ calculations from AMADEUS database. Stefano Scarpetta, IBM Chair, Labour Market Course 46

Heterogeneity and reallocation Firm-level decompositions of aggregate productivity
Average productivity levels/growth in the aggregate and in each industry depend on the dispersion of productivity levels/growth across incumbents and firms entering and exiting markets. That is: efficiency levels/improvements within each firm, allocation/reallocation of resources across firms with different efficiency levels/growth entry/exit of firms with different efficiency levels/growth There are several ways to decompose average productivity levels/growth into these different static and dynamic elements. Methods are similar to, albeit more complicated than, those used in shift-share analysis. Stefano Scarpetta, IBM Chair, Labour Market Course

Job and worker flows (% of total number of jobs or workers)
Huge jobs and worker turnover. Dynamism at level of businesses has strong implications for jobs/worker Source: forthcoming OECD Employment Outlook, 2009. Stefano Scarpetta, IBM Chair, Labour Market Course

Focusing on the reallocation channel, two interesting questions arise when comparing cross-country productivity performances: Static efficiency of resource allocation. Is resource allocation correlated with firm productivity? Have the most efficient firms the largest shares of the market? Dynamic efficiency of resource allocation. Do resources move efficiently across heterogeneous firms? Do better firms grow faster? Stefano Scarpetta, IBM Chair, Labour Market Course

where P is productivity and θ is firm’s market share
Heterogeneity and reallocation Firm-level decompositions of aggregate productivity The static efficiency issue can be addressed using a decomposition of productivity proposed by Olley and Pakes (2004): where P is productivity and θ is firm’s market share Simple Average Allocative Efficiency Stefano Scarpetta, IBM Chair, Labour Market Course

Differences in allocative efficiency, especially in services
Contribution of resource allocation to sectoral MFP levels (Based on Olley-Pakes productivity decomposition) Stefano Scarpetta, IBM Chair, Labour Market Course 51

A digression: evolution of OP cross term in transition economies
Labour productivity? Stefano Scarpetta, IBM Chair, Labour Market Course

Focusing on the between/reallocation channel, two interesting questions arise when comparing cross-country productivity performances: Static efficiency of resource allocation. Is resource allocation correlated with firm productivity? Have the most efficient firms the largest shares of the market? Dynamic efficiency of resource allocation. Do resources move efficiently across heterogeneous firms? Do better firms grow faster? Stefano Scarpetta, IBM Chair, Labour Market Course

Different Abilities of Countries to Channel Resources towards More Productive Firms
ESP FRA ITA GBR Growing faster Average Growing slower Most productive Least productive Basic question here: Do better firms grow faster? Labour productivity? Stefano Scarpetta, IBM Chair, Labour Market Course Growth of real value added by productivity quartiles (relative to average of country/sector/year group) 54

The decomposition of productivity growth
Foster, Haltiwanger and Krizan (2001): in this decomposition, each term is weighted by beginning of the period market shares as follows: the first term is the within component; the second is the between component, the third term is the cross component, while fourth and fifth are the entry and exit component, respectively. Stefano Scarpetta, IBM Chair, Labour Market Course

Within-firm productivity growth makes the bulk of overall productivity growth

… but technology matters

The main conclusions from this firm-level analysis are: Within-firm efficiency improvements have been the main driver of productivity growth in most OECD countries Aggregate improvements due to reallocation of resources across sectors and, within each of them across firms have played an important role especially in most dynamic industries, such as ICT- related ones Each of these channels of productivity improvements operates in different ways: Within-firm effects are driven by elimination of slack, technology adoption and innovation. Between firm effects are driven by the ability to allocate resources (i.e. labour and capital) to the most efficient firms or industries Turnover effects depend on the ability of new firms to enter markets and experiment as well as on the ability of the economy to get rid of inefficient firms Stefano Scarpetta, IBM Chair, Labour Market Course

IBM Chair, Labour Market Course November, Milan

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