1. GGDC THE END OF CONVERGENCE: MARKET SERVICES PRODUCTIVITY IN EUROPE Robert Inklaar, Marcel Timmer and Bart van Ark Groningen Growth and Development Centre, University of Groningen This paper is written as part of the EU KLEMS project on Growth and Productivity in the European Union. This project is funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, "Policy Support and Anticipating Scientific and Technological Needs".

2. GGDC Convergence norm in post-war period Post-war period

3. GGDC But no more since mid-1990s

4. GGDC Main findings Convergence has stopped in Europe and between EU and US in mid-1990s Market services important source Skills, ICT and regulation are not the source of this divergence Technology transfer in services still not well understood

5. GGDC Market services important source of divergence

6. GGDC Data on MFP growth and levels Use MFP growth from EU KLEMS Use output PPPs and labour and capital data to come up with input PPPs (45xII, 2xL, 6xK) Multilateral MFP level comparison for 1997, extrapolated using relative growth Look at MFP level relative to the leading country

7. GGDC And also break in convergence

8. GGDC More formal analysis Positive: convergence InnovationImitation Unconditional convergence: Conditional convergence:

9. GGDC Unconditional convergence stopped Country, industry and year dummies included MFP gap lagged once Same picture for later break years Period-average MFP growth => insensitive to MFP measures

10. GGDC Human capital: some effect on convergence? After 1995: closer to the frontier => more impact from human capital No effect on innovation Not consistent across measures, sensitive to break year At best partial explanation

11. GGDC Regulation: conflicting evidence for earlier period

12. GGDC ICT: no additional impact on MFP

13. GGDC Conclusions End of convergence, but why? Technology transfer in manufacturing R&D + skills (Griffith et al., 2004) Technology transfer in services Organizational change, management practices? How to find out? Measurement of intangibles