Franco-German Conference. Paris. July 2016

Productivity, Investment,
and Growth – Where we
stand, What we know
Alexander Schiersch & Martin Gornig
07.07.2016

Motivation
Real GDP, 1995-2015
Source: AMECO database
60.00
70.00
80.00
90.00
100.00
110.00
120.00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2010=100
Germany France Italy Spain UK Japan USA
Alexander Schiersch & Martin Gornig, DIW Berlin
Franco-German Conference CEPII-CESifo-DIW-OFCE2

Motivation
“Productivity isn’t everything, but in the long run it is almost
everything. A country’s ability to improve its standard of living
over time depends almost entirely on its ability to raise
its output per worker.”
Paul Krugman

1. Trends in productivity
2. Private sector investments and development of capital stocks
3. Investment restraint in the public sector

1 Trends in Productivity
Labour productivity, annual growth, 1976-2014
Source: SVR, 2015; HP-Filter, 𝜆 = 100
-1
0
1
2
3
4
5 1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
percentagepoints
Germany France Italy Spain UK Japan USA

TFP growth, 10y averages, 1976-2015
-1
-0.5
0
0.5
1
1.5
2
2.5
Germany France Italy Spain United
Kingdom
Japan United States
percentagepoints
76-85 86-95 96-05 06-15

Some reasons for the slowdown of productivity growth:
a. Structural change toward services and public sectors
(SVR, 2015)
b. End of productivity gains from outsourcing/reorganizing value
chains; one of the main drivers of productivity between 1995 and
2005 (SVR, 2015)
Country
1995 – 2004 2005 – 2014 Share of
manufacturing
in total value
added
Total LP
growth
LP
growth
manufact
uring
LP
growth
service
sectors
Total LP
growth
LP
growth
manufact
uring
LP
growth
service
sectors 1995 2014
Germany 1.9 3.1 1.3 0.8 1.6 0.6 22.8 22.6
France 1.8 4.4 1.2 0.8 2.4 0.7 16.2 11.2
Italy 0.5 0.9 0.3 0.1 1.0 – 0.3 20.9 15.4
Spain 0.0 1.1 0.0 1.6 2.0 1.0 17.6 13.2
UK 2.2 3.6 2.1 0.4 1.7 0.6 19.0 9.5
USA 2.3 5.9 1.2 0.9 2.3 0.4 15.9 12.0
Source: SVR, 2015, Tab. 26

c. Rising productivity gap between global frontier firms and laggard
firms – hampered diffusion of technology (Andrews et al. 2015;
OECD 2015)
Source: Andrews et al., 2015, Fig.1
Percentage difference in labour productivity levels from their 2001 values (2001=0)

d. Increasing skill mismatch due to rigidities in labour markets (OECD,
2015)
e. Hampered reallocation of resources from aging and less productive
incumbents toward dynamic thriving new entrants (OECD, 2015)
f. Time lag (up to 30 years) between path braking innovations and its
widespread use (Brynolfsson & Andrew, 2015)
g. Rapid implementation of new technological innovations hampered
by insufficient investment

2
Private sector investments and
capital stocks

2 Private sector investments and capital stocks
80
85
90
95
100
105
110
115
120
2007
2008
2009
2010
2011
2012
2013
2014
2015
2007=100
Germany France UK USA
Growth of private non-residential gross fixed capital formation (real)
Source: OECD Economic Outlook 98 Database, Main Economic Indicator database

90
92
94
96
98
100
102
104
106
108
2007
2008
2009
2010
2011
2012
2013
2007=100
Germany France UK USA
Growth of (real) net capital stock in manufacturing
Source: destatis, BEA, ONS, INSEE; own calculations

-25 -20 -15 -10 -05 00 05 10 15 20 25
Electrical equipment (C27)
Computer, electronic and optical products (C26)
Pharma and Chemical products (C20t21)
Machinery and equipment (C28)
Motor vehicles & transport equipment (C29t30)
percentage points (cumulative, 2007-2013), real net capital stock
USA UK France Germany
Change in (real) net capital stock of
R&D-intensive manufacturing industries, 2007-2013
Source: destatis, BEA, ONS, INSEE; own calculations

What can generally be done to stimulate private sector investments
(OECD 2015):
a. Reduce political uncertainties
b. Ease entry and exit
c. Strengthen antitrust policy, enhancing competition
What can be done (from a German perspective):
a. Reform depreciation methods (DIW, 2016a; DIW & HRI, 2014 )
• switch from linear to decreasing balance method of depreciation
• overhaul of depreciation periods and depreciation factors
(reform of Afa-Tables)
b. Increase public sector investments to enhance demand and renew
capital stock (DIW, 2016b)

3
Investment restraint
in the public sector

3 Investment restraint in the public sector
Investment ratios by public authorities
as percentage of gross domestic product, at current prices
Source: German Federal Statistical Office; own calculations
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Overall
States
Federal level
Municipalities

Federal level Federal States Municipalities Overall
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
-5
0
5
10
15
Source: German Federal Statistical Office; own calculations
Net fixed capital formation by level of government
In billion euros, current prices

(343,724]
(253.5,343]
(186,253.5]
[35,186]
No data
Investment at local levels
Euro per capita, 2013
Source: DIW, 2015b, Abb. 2

0
50
100
150
200
250
300
350
400
Socialexpenditurespercapita
0 100 200 300 400 500 600 700 800
Investment per capita
Correlation between social costs and public investments at municipality level
Euro per capita, 2013
Source: DIW, 2015b, Abb. 5

3 Some suggestions from the German perspective
Some suggestions for strengthening municipalities in the Germany:
a. Municipality’s tax revenues:
• federal government has few options to directly support specific
municipalities (GRW)
• support via states; this would require modifying the horizontal fiscal
equalization scheme by fully including municipality tax income
(Länderfinanzausgleich) (DIW, 2015a)
b. Municipality’s expenditures: Reimbursement of (more) social
expenditures by the federal level (DIW, 2015c)

Vielen Dank für Ihre Aufmerksamkeit.
DIW Berlin — Deutsches Institut
für Wirtschaftsforschung e.V.
Mohrenstraße 58, 10117 Berlin
www.diw.de
Redaktion
Dr. Alexander Schiersch, aschiersch@diw.de

Literature
Andrews, D., E. Bartelsman and C. Criscuolo (2015), “Firm Dynamics and Productivity Growth in Europe”
Mimeo.
Arnold, F., R. Freier, R. Geissler, P. Schrauth (2015b): Große regionale Disparitäten bei den kommunalen
Investitionen, DIW Wochenbericht 43.
Brynjolfsson E. & A. McAfee (2015): The Second Machine Age: Work, Progress, and Prosperity in a Time of
Brilliant Technologies, Norton & Company.
Dreger, C., H.-E. Reimers (2016b): Welcher Zusammenhang besteht zwischen öffentlich und privaten
Investitionen?, DIW Wochenbericht 18.
Fratzscher, M., M. Gornig, A. Schiersch (2016a): Weak Corporate Investment Requires Immediate, DIW
Economic Bulletin 15.
Fratzscher, M., R. Freier, M. Gornig (2015c): Kommunale Investitionsschwäche überwinden, DIW
Wochenbericht 43.
Gornig, M., C. Michelsen, K. van Deuverden (2015a): Kommunale Infrastruktur fährt auf Verschleiß, DIW
Wochenbericht 43.
DIW & HRI (2014): Private Investitionen in Deutschland, Studie im Auftrag des Gemeinschaftsausschuss
der Deutschen Gewerblichen Wirtschaft.
OECD (2015): The Future of Productivity, OECD, Paris.
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2015): Zukunftsfähigkeit
in den Mittelpunkt, Jahresgutachten 2015/16, Statistisches Bundesamt, Wiesbaden.

-4
-3
-2
-1
0
1
2
3
4 Germany
France
Italy
Spain
UK
Japan
USA
percentagepoints
reduction in working hours
increase in value added
real labour productivity growth
-4
-3
-2
-1
0
1
2
3
4
Germany
France
Italy
Spain
UK
Japan
USA
percentagepoints
reduction in working hours
increase in value added
real labour productivity growth
Source: SVR, 2015, Abb. 90
Components of labour productivity change
1995-2004 2005-2014

A1 Trends in Productivity
TFP growth, 5y averages, 1976-2015
-1
-0.5
0
0.5
1
1.5
2
2.5
3
Germany France Italy Spain United
Kingdom
Japan United States
percentagepoints
71-75 76-80 81-85 86-90 91-95 96-00 01-05 06-10 11-15

Franco-German Conference. Paris. July 2016

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