Productivity Growth in Service Industries – Evidence from European Union Countries

Joanna Wyszkowska-Kuna

University of Łódź

Faculty of Economics and Sociology

Productivity Growth in Service Industries –

Evidence from

European Union Countries

The 2018 International Conference on Economics and Statistics (ES 2018) 19-21 May 2018, Prague

Aim:

To examine TFP growth in the service sector in

comparison with total economy, agriculture and

industry (including the manufacturing sector), as

well

as within the service sector

Method:

The decomposition of output volume growth

(Jorgenson and Griliches, 1967; Jorgenson et al.,

1987)

Data:

Covered period:

1995-2015 (in the case of some countries it is

shorter).

It is divided into three sub-periods:

1995-2007, 2008-2010 and 2011-2015.

Covered countries:

Those EU countries for which it is possible to

calculate TFP growth – because of the lack of data on

capital input for Belgium, Ireland, Portugal, Bulgaria,

Latvia, Croatia, Cyprus, Malta and

Romania these

countries are excluded from the study.

Productivity growth in services

• Fourastie (1954) was the first to note that technological progress and the resulting productivity growth is diversified in particular sectors of the economy – its rate is moderate in agriculture, high in industry, and low in the service sector. In a result, for a few decades there was a belief that that the shift towards an economy with a larger share of services (in employment and value added) might imply a reduction in the rate of productivity growth (Baumol, 1967; Baumol et al., 1985, 1989).

• The ICT revolution has contributed to the increasing use of the latest technologies in some service industries (banking, communications, telecommunications, transport, insurance, education, science, and

healthcare), which has created some new opportunities for productivity improvement of the service sector.

Productivity measurement – services

• Since the 90s. the number of papers on productivity growth in services have increased, but they generally proved that productivity

improvement in services are harder to achieve than in goods producing industries:Triplett and Bosworth (1999, 2003); Mulder (1999);

Mairesse and Kremp (1993); Baumol (1967, 2002); Baumol, Blackman and Wolf (1994); Licht and Moch (1999); Ark, Monnikhof and Mulder (1999); Grönroos and Ojasalo (2004); Baláž (2004); Sahay (2005);

Djellal and Gallouj (2008); Savona and Steinmueller (2013); Biege et al. (2013); Grassano and Savona (2014).

• In the meantime, the studies indicating problems with the

measurement of service productivity and the resulting high probability of the underestimation of productivity growth in service industries

Productivity measurement – services

• Productivity measurement concepts have been deeply rooted in the

context of mass manufacturing. They are based on contrasting input

and output.

• Measuring the productivity of services raises problems with

measuring the output of service activities due to their peculiarities,

such as: intangibility, heterogeneity, inseparability and perishability.

• The customer is always a part of the service and hence the customer

actions need to be considered on the input side and consequently

quantifying customer co-operation is necessary (Blois, 1985;

Grönroos, 1990).

• Furthermore, service readiness, which is the major prerequisite of

service delivery, also needs to be incorporated into measuring

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Productivity measurement – services

• With the improvement of measurement methods, some better results for productivity growth in service industries can be expected.

• The construction of EU KLEMS and WIOD databases gave the opportunity to calculate TFP growth for different countries on comparable basis. However, even in these

cases, one should note the risk of lower reliability of data on service industries than on manufacturing industries – when constructing these databases a variety of

additional data sources were used, which are generally less numerous and often more incomplete in the case of service industries (O'Mahony and Timmer, 2009). • Finally, according to Hershey and Blanchard (1980) problems can result from

concentrating on increased productivity defined as output. They suggest

effectiveness of the firm is a better productivity measurement. The value added

concept provides an index for monitoring the effectiveness of the effort put in by the employees in obtaining market situation (Vrat et al., 1998).

• Therefore, in the present study TFP is calculated based on value added (as it is also suggested in the recent edition of EU KLEMS).

Methodology

j = (1, 2, …, n), and

, , ,

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Methodology

• Labour input is the number of hours worked by persons engaged (EU KLEMS, 2017). The category “persons engaged” is broader than the category “employees”, because it includes, in addition to employees, self-employed workers (Timmer et al., 2007: 25).

• Capital input is the value of real fixed capital assets in 2010 prices multiplied by the number of hours worked per person engaged (EU

KLEMS, 2017). The number of hours worked per person engaged is used as an indicator showing the shift-factor, i.e. the degree to which capital assets are used in the analyzed period, depending on the economic situation.

• Labour compensation is the compensation of all persons engaged,

while capital compensation (EU KLEMS, 2017) is derived as gross value added minus labour compensation (O'Mahony and Timmer, 2009: 380).

Industries (NACE Rev. 2)

• TOT – Total industries • A – Agriculture

• B – Mining and quarrying • C – Manufacturing

• F – Construction • S – Total services:

oG –Wholesale and retail trade; repair of motor vehicles and motorcycles; oH – Transportation and storage;

oI – Accommodation and food service activities;

oJ – Information and communication (Publishing, audiovisual and broadcasting activities – 58-60; Telecommunications – 61; IT and other information services – 62-63);

oK – Financial and insurance activities; oL – Real estate activities;

oM-N – Professional, scientific, technical, administrative and support service activities;

oO-U – Public administration and defence; compulsory social security – O; Education – P; Health and social work – Q; Arts, entertainment, recreation and other service activities – R-S; Activities of households as employers; undifferentiated goods- and services-producing activities of

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Industries (NACE Rev. 2)

• MS – market services – without public services, i.e. O, P, Q

and T-U (which are usually omitted).

• KIBS – knowledge-intensive business services:

o J62-63 – Computer programming, consultancy and related

activities; information service activities;

o M69-70 – Legal and accounting activities; activities of head

offices; management consultancy activities;

o M71 – Architectural and engineering activities; technical

testing and analysis;

o M72 – Scientific research and development;

o M73 – Advertising and market research.

Average annual TFP growth rate in the 12 and

EU-6(7) in the period 1995/2000-2007 (in pp)

TOT A B C F Services MS KIBS

-6 -4 -2 0 2 4 6 8 0.73 2.28 0.53 0.93 -1.03 2.32 5.79 1.77 _1.63 2.78 EU-12 EU-6/7

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Average annual TFP growth rate in the EU-12 and EU-6(7)

in the period 2008-2010 (in pp)

TOT A B C F Services MS KIBS

-8 -6 -4 -2 0 2 4 6 -0.52 0.59 -0.5 -0.95 -1.72 0.54 3.72 -0.6 _-0.83 -1.79 EU-12 EU-6/7

Average annual TFP growth rate in the EU-12 and EU-6(7)

in the period 2011-2014/15 (in pp)

TOT A B C F Services MS KIBS

-4 -2 0 2 4 6 8 0.32 0.82 0.46 0.68 0.89 0.5 2.06 -0.1 0.34 0.53 EU-12 EU-6/7

AUT DNK FIN FRA 95-07 08-10 11-15 95-07 08-10 11-15 95-07 08-10 11-15 95-07 08-10 11-15 TOT 1,2 -0,3 0,6 0,4 0,6 0,8 2,4 -1,6 -0,7 0,8 -0,6 0,6 A 5,6 -0,4 4,4 4,1 16,6 9,4 2,7 5,8 2,2 3,2 3,5 0,6 B 1,9 -9,5 -5,4 1,5 -1,8 -11,5 0,2 13,0 -8,0 -0,7 -3,8 -1,3 C 2,6 -2,4 0,7 1,3 1,4 3,1 6,4 -4,5 -0,6 2,9 1,9 1,1 F -0,1 -5,8 -0,6 -0,6 -2,6 2,6 -0,4 3,0 -1,0 -0,3 -3,1 -1,1 Services 0,6 0,8 0,3 0,2 0,4 0,8 0,8 -1,2 -0,6 0,6 -0,6 0,7 MS 0,6 0,3 0,3 0,2 1,0 0,5 1,3 -1,5 -0,5 2,0 -1,0 0,3 KIBS -0,1 0,2 0,1 -1,9 -0,6 2,3 0,6 -2,7 1,1 -1,1 -1,9 -0,2 GER GBR GRC ITA TOT 1,3 -0,6 0,5 0,9 -0,1 -0,3 1,1 -1,8 -0,8 0,0 -0,9 0,3 A 5,1 -12,8 -0,9 3,4 -11,7 1,8 -0,8 4,8 2,7 1,5 1,1 -0,2 B 0,3 1,0 -0,3 1,0 -5,4 -9,5 3,2 -1,7 -0,5 -1,7 -8,7 9,8 C 3,1 1,1 0,5 2,3 1,8 -0,1 1,0 -4,6 1,1 0,5 0,2 1,0 F -0,2 2,0 -0,6 0,1 0,3 -1,8 2,0 8,4 -4,4 -1,2 -4,2 1,6 Services 0,9 -1,1 0,6 0,9 0,3 0,2 0,8 -2,4 -0,8 -0,1 -0,8 0,1 MS 1,3 -2,0 0,8 1,1 0,6 0,7 0,4 -4,5 1,7 -0,2 -0,8 0,2 KIBS -2,0 -3,5 1,5 2,2 1,0 2,1 -4,0 -13,2 -6,5 -2,3 -1,6 -0,3

LUX NLD ESP SWE

TOT 0,6 -0,7 0,1 0,8 -0,6 0,7 -1,2 0,2 0,6 1,1 -1,4 0,1 A 1,0 0,8 6,7 2,5 2,3 0,8 3,3 0,1 0,5 3,5 -4,6 -1,6 B -1,3 -9,8 -4,2 -2,2 1,8 -10,2 -1,7 -3,2 -9,6 -2,2 -9,6 -15,8 C 1,4 -3,8 8,5 2,8 -1,3 0,6 0,0 -0,6 3,0 4,0 1,3 -1,1 F 1,0 1,2 -3,2 1,2 -4,5 2,3 -4,1 0,0 -0,3 0,7 -3,8 -4,7 Services 0,5 -0,6 -0,3 0,7 -0,2 0,8 -0,4 0,2 0,7 0,4 -1,4 1,2 MS 0,5 0,1 -0,5 1,0 -0,9 0,9 -0,6 -0,7 1,1 1,1 -2,5 2,2 KIBS -5,2 -4,9 2,2 -0,3 -1,1 1,5 -3,8 -1,0 1,3 0,6 -0,4 1,8

CZE EST LTU 95-07 08-10 11-14 00-07 08-10 11-14 00-07 08-10 11-14 TOT 1,7 -1,1 1,1 1,8 0,5 0,9 4,5 -3,6 2,0 A -0,7 1,0 2,2 -4,8 6,3 5,3 6,7 0,6 0,6 B -2,7 -3,5 0,9 5,0 -2,6 2,6 -4,5 -7,1 -4,5 C 4,8 1,3 -0,4 0,7 3,9 3,5 5,0 0,9 4,4 F -2,7 -2,1 2,8 -9,6 4,7 -3,2 9,1 -13,5 4,1 Services 0,6 -1,0 1,7 2,7 -1,2 0,4 2,8 -4,0 1,9 MS 0,7 -1,6 2,4 4,2 -0,5 1,1 2,9 -4,8 1,4 KIBS -0,2 -4,1 0,1 6,2 -1,6 1,3 6,7 -10,1 1,7 HUN POL SVK SVN 11-14 03-07 08-10 04-07 08-10 11-15 00-07 08-10 11-15 TOT 1,3 2,9 2,3 3,1 -1,0 1,3 3,1 -1,0 1,3 A 5,7 15,1 5,4 -2,1 -7,5 4,8 -2,1 -7,5 4,8 B 5,8 -4,5 -11,5 -8,9 -5,1 2,7 -8,9 -5,1 2,7 C 0,5 3,6 3,5 4,9 1,6 4,3 4,9 1,6 4,3 F 3,8 -1,1 7,2 4,6 -7,0 -1,3 4,6 -7,0 -1,3 Services 1,0 2,7 -0,2 1,9 -1,0 0,3 1,9 -1,0 0,3 MS 0,9 3,1 0,0 -1,0 -2,2 1,2 -1,0 -2,2 1,2 KIBS -3,5 2,2 -0,8 10,6 -1,1 -1,3 10,6 -1,1 -1,3

Average annual TFP growth rate in the EU-12 (in pp)

Average annual TFP growth rate in the EU-6(7)

(in pp)

G H I J K L M-N O-U O P Q Services MS KIBS

-10 -8 -6 -4 -2 0 2 4 6 2000-2007 2008-2010 2011-2015

• The growth rate of TFP was significantly lower in the service sector than in the

manufacturing sector, but while comparing with total economy the disparity was much less significant (in the last period it was even higher in services than in total economy in the EU-12).

• After the outbreak of the recent financial crisis, TFP in the service sector declined. In manufacturing it was still on increase.

• The growth rate of TFP was usually higher in market services than in total services, and it was the highest with respect to KIBS (mainly in the EU-6/7). The same tendency is visible during the period of decline.

• TFP growth was generally higher in the EU-6/7 than in the EU-12.

• Information and communication is the only category where TFP increased for all three periods in both groups.

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Conclusions