Transcript Growth of Labor Productivity and its Correlates

Productivity Growth, Job
Creation and Demographic
Change in Eastern Europe
and the Former Soviet
Union
Pradeep Mitra
Chief Economist
Europe and Central Asia Region
Lunchtime Presentation at the 12th Dubrovnik Economic Conference in
Dubrovnik, Croatia, June 28 – July 1, 2006
1
The Presentation
1. GDP Growth and its Components
2. Growth of Labor Productivity and
its Correlates
3. Job Creation and its Correlates
4. The Business Environment facing
Firms
5. The Demographic Challenge
6. Conclusions
2
The Presentation
1. GDP Growth and its Components
2. Growth of Labor Productivity and its
Correlates
3. Job Creation and its Correlates
4. The Business Environment facing Firms
5. The Demographic Challenge
6. Conclusions
3
Growth in GDP per capita from 1998 to 2003, the most rapid for CIS countries
recovering from a deep transitional recession, owes more to growth in labor
productivity (GDP/EMPL) than improved employment rates (EMPL/Working
POP) or favorable demography (Working POP/POP)
(Growth in GDP/POP) = (Growth in GDP/EMPL) +
(Growth in EMPL/Working POP) + (Growth in Working POP/POP)
Average annual growth in GDP per capita and its components, 1998-2003
15%
10%
GDP/EMP
EMP/Working age POP
Working age POP/POP
GDP/POP
5%
0%
-5%
-10%
Working age population covers the age range 15-64
Source: ILO LABORSTA database, World Development Indicators
Macedonia, FYR
Czech Republic
Poland
Slovak Republic
Slovenia
Croatia
Romania
Moldova
Hungary
Bulgaria
Lithuania
Belarus
Estonia
Georgia
Ukraine
Albania
Latvia
Russian Federation
Armenia
Kazakhstan
Azerbaijan
-15%
4
Real wage
growth,
reflecting
gains in labor
productivity,
outpaced net
employment
growth in
transition
economies
World Bank (2005a)
5
Indeed the employment rate (EMPL/Working POP) continued to fall in
many countries after 1998. Slack labor markets are manifest in either
open unemployment, falling labor force participation or low-productivity
employment. While the employment rate is generally higher in CIS
countries, (compared to the EU-8 countries where it falls short of the
Lisbon target of 70%) many jobs in the CIS are in low-productivity
occupations partly because . . . .
Employment Rates: Early Transition, 1998 and 2003
90%
Earliest year
1998
2003
80%
70%
60%
50%
40%
30%
20%
Source: ILO LABORSTA database, World Development Indicators
Note: The employment rate in Moldova between 1998 and 2003 shows a decline based
on LFS but an increase based on household survey data (previous slide) on account
of a likely more restrictive definition of informal sector employment in the LFS.
Albania
Moldova
Armenia
Poland
Hungary
Slovak Republic
Bulgaria
Ukraine
Romania
Lithuania
Belarus
Slovenia
Estonia
Czech Republic
Azerbaijan
Kazakhstan
0%
Russian Federation
10%
Note: The earliest years (blue bars) for each country are as
follows:
1990:Azerbaijan, Belarus, Bulgaria and Estonia
1992: Hungary, Russia
1993: Armenia, Czech Republic, Kazakhstan, Poland and Slovenia
1994: Albania, Lithuania, Romania and Slovak Republic.
1995: Moldova and Ukraine.
6
. . . . de-industrialization in low income CIS (e.g. Kyrgyz Republic) has
been accompanied by a large labor transfer into agriculture in the
absence of adequate social safety nets. Not so in Central Europe (e.g.
Czech Republic), where over-industrialization has been corrected
through a reduction in agricultural and industrial employment, with jobs
moving to market services, but with high open unemployment and/or low
labor force participation in some countries.
1989
1989
2002
2000
0%
25%
Agriculture
50%
Industry
75%
Services
Czech Republic
Source: World Bank (2005b)
100%
0%
25%
Agriculture
50%
Industry
75%
100%
Services
Kyrgyz Republic
7
Since value added per worker is the lowest in agriculture, a shift in employment
away from agriculture and into services in EU-8 and middle income CIS has been
productivity-enhancing. While EU-8 countries approached or exceeded levels of
productivity typically observed in middle-income developing countries (e.g.
Colombia. Turkey), the middle income CIS and SEE lagged significantly. And low
income CIS exhibit levels and patterns of productivity typical of low-income
developing countries (e.g. Vietnam).
EU8 Countries
Czech Rep, Estonia,
Hungary, Latvia, Lithuania,
Poland, Slovakia, Slovenia
SEE Countries
Albania, Bosnia, Bulgaria,
Croatia, Macedonia,
Romania, Serbia and
Montenegro
Middle Income CIS
Belarus, Kazakhstan,
Russia, Ukraine
Low Income CIS
World Bank (2005a)
Armenia, Azerbaijan,
Georgia, Kyrgyzstan,
Moldova, Tajikistan,
Uzbekistan
8
The Presentation
1. GDP Growth and its Components
2. Growth of Labor Productivity
and its Correlates
3. Job Creation and its Correlates
4. The Business Environment facing
Firms
5. The Demographic Challenge
6. Conclusions
9
Between
Cross
Entry
S
un A
g
R ary
om
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ia
U
K
H
Ar
g
Within
U
in
a
C
C hil
ol e
om
b
Es ia
to
n
Fi ia
nl
an
Fr d
an
ce
Ko
re
a
N La
et
t
he via
rla
n
Sl ds
ov
en
Ta ia
iw
an
Sources of Productivity Growth in Transition, Emerging, and OECD Countries
140
120
100
80
60
40
20
0
-20
-40
-60
-80
en
t
% of total labor productivity growth
The change in aggregate labor productivity is decomposed into (i)
within-firm, (ii) between-firm, and (iii) cross components1/, and the
contribution of (iv) entrant and (v) exiting firms. The decomposition
shows that . . . .
Exit
Labor Productivity growth - Five -Year Differencing, Real Gross Output.
For Hungary and Romania the decomposition refers to a three-year differencing.
Labor Productivity decomposition shares – Manufacturing Five-Year Differencing, Real Gross Output
For Hungary and Romania the decomposition refers to a three-year differencing which, given significant learning and selection by new entrants,
underestimates the contribution of entry to productivity growth.
1/ The cross term reflects gains in productivity from expanding employment shares in high productivity-growth firms or shrinking employment
shares in low productivity-growth firms
Source: Staff estimates based on Bartelsman, Haltiwanger and Scarpetta (2004)
10
. . . . firm entry and exit are more important in transition countries,
contributing between 20 to 45 percent of productivity growth, as
against between 3 and 35 percent in developed and other developing
countries.
11
In the low income CIS, 40 percent or more of the labor force
is engaged in agriculture. Land distribution from collective farms to
poor rural households in low income CIS – Armenia and Georgia
(early ’90s), Kyrgyz Republic (mid 90s)’, Azerbaijan and Moldova
(late ’90s) – led to important gains in labor productivity and, because
of the high labor intensity of agriculture, to growth in household
farming and reduction of potential unemployment
Factor Intensity and the Growth of Household Farms
Individual farming 5 years after reform
100
China
Share of land use
80
Balkans
60
Caucasus
40
20
Central Eur
Core CIS
0
0
0.1
0.2
0.3
0.4
0.5
Persons per 100 hectares
0.6
0.7
0.8
12
Source: Macours and Swinnen (2004), World Bank (2005a)
The Presentation
1. GDP Growth and its Components
2. Growth of Labor Productivity and its
Correlates
3. Job Creation and its Correlates
4. The Business Environment facing
Firms
5. The Demographic Challenge
6. Conclusions
13
Increasingly dynamic labor markets were reflected in a dramatic
rise in job reallocation (the sum of job creation1/ and job
destruction2/ rates) in transition countries from less than 10% of the
workforce in the late ’80s to more than 20-25% in the ’90s, indeed to
levels equaling or exceeding those in developed countries and
lagging slightly below those in developing countries
1/
2/
Employment gains during a year divided by average employment during the year.
Employment losses during a year divided by average employment during the year.
14
Job destruction generally surged first but it was the response of job
creation which varied across countries – catching up rapidly with
job destruction in leading reformers but staying lower than job
destruction for prolonged periods in lagging reformers
15
Firm entry contributed
strongly (25% to 50%) to job
creation. But their
contribution was even higher
in the earlier years and
declined over time except in
Russia and Ukraine – both
late reformers – where the
role of firm entry in job
creation increased in the
second half of the 1990s. In
contrast to the behavior of
entrant firms, existing firms
resorted on average to
“defensive restructuring”, i.e.
improved productivity by
downsizing and shedding
redundant labor.
16
The Presentation
1. GDP Growth and its Components
2. Growth of Labor Productivity and
its Correlates
3. Job Creation and its Correlates
4. The Business Environment
facing Firms
5. The Demographic Challenge
6. Conclusions
17
The business environment has been improving steadily in the
transition countries, but is generally still more difficult than in
the cohesion countries of Western Europe, with labor
regulations a notable exception
3.5
3.0
2.5
2.0
1.5
1.0
Regulation
Labour
Taxation
1999
2002
Institutions
2005
Infrastructure
Finance
Macro
instability
Cohesion countries 2005
The business environment was assessed on a scale from 1 (no obstacle) to 4 (major obstacle)
Cohesion countries include Greece, Ireland, Portugal and Spain
Transition countries include Albania, Armenia, Azerbaijan, Belarus, Bosnia, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan,
Kyrgyzstan, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Serbia and Montenegro, Slovakia, Slovenia, Tajikistan, Ukraine, Uzbekistan
Cohesion countries include Greece, Ireland, Portugal and Spain
Source: EBRD-World Bank Business Environment and Enterprise Performance Surveys 1999, 2002, 2005
18
Unbundling by ownership category reveals that
business environment in 2005 more difficult for de
novo than privatized and state firms in areas such as
regulation and institutions protecting property rights,
as well as taxation . . . .
3.0
2.5
2.0
1.5
1.0
de novo
state & privatized
Regulation
Cohesion countries
de novo
state & privatized
de novo
Taxation
New EU member states
SEE
state & privatized
Institutions
Middle Income CIS
The business environment was assessed on a scale from 1 (no obstacle) to 4 (major obstacle)
Source: EBRD-World Bank Business Environment and Enterprise Performance Survey, 2005
Low Income CIS
19
. . . . particularly with respect to customs and trade
regulations and business licensing and permits, within
the overall area of regulatory constraints . . . .
2.5
2.0
1.5
1.0
de novo
state & privatized
de novo
Customs and trade regulations
Cohesion countries
New EU member states
state & privatized
Business licensing and permits
SEE
Middle Income CIS
Source: EBRD-World Bank Business Environment and Enterprise Performance Survey, 2005
Low Income CIS
20
. . . . as well as with respect to judiciary and corruption,
within the overall area of institutions. Hence business
environment is more difficult for de novo firms which are
critical for productivity growth and job creation.
3.0
2.5
2.0
1.5
1.0
de novo
state & privatized
de novo
Judiciary
Cohesion countries
state & privatized
Corruption
New EU member states
SEE
Middle Income CIS
Source: EBRD-World Bank Business Environment and Enterprise Performance Survey, 2005
Low Income CIS
21
Moving from entrant firms to potential exiters, while the
fraction of firms with arrears has been falling and those
receiving subsidies is virtually unchanged between 2002
and 2005 (although note that the fraction of subsidized
firms in SEE and CIS is already lower than in the cohesion
countries) . . . .
0.3
0.2
0.1
0.0
2002
2005
2002
Subsidies
Cohesion countries
New EU member states
2005
Arrears
SEE
Middle Income CIS
Low Income CIS
Source: EBRD-World Bank Business Environment and Enterprise Performance Surveys, 2002, 2005
22
. . . . subsidies from all levels of government to a higher
fraction of state and privatized firms compared to de
novo firms in 2005 retard the exit of the former . . . .
0.5
0.4
0.3
0.2
0.1
0
Cohesion countries
New EU member
states
SEE
state & privatized
Middle Income CIS
Low Income CIS
de novo
23
Source: EBRD-World Bank Business Environment and Enterprise Performance Survey, 2005
. . . . and arrears owed by a higher fraction of state and
privatized firms compared to de novo firms in 2005 on
utility payments and taxes as well as to employees and
suppliers also retard the exit of the former.
0.3
0.2
0.1
0.0
Cohesion countries
New EU member
states
SEE
Middle Income CIS
state & privatized de novo
The business environment was assessed on a scale from 1 (no obstacle) to 4 (major obstacle)
Source: EBRD-World Bank Business Environment and Enterprise Performance Survey, 2005
Low Income CIS
24
The Presentation
1. GDP Growth and its Components
2. Growth of Labor Productivity and
its Correlates
3. Job Creation and its Correlates
4. The Business Environment facing
Firms
5. The Demographic Challenge
6. Conclusions
25
While the population is expected to decline by over 15
percent by 2025 in Ukraine, Bulgaria and Georgia on
account of aging, it is expected to expand by over 30
percent by 2025 in Turkey, Turkmenistan, Uzbekistan
and Tajikistan
Percentage Change in Population in ECA Countries, 2000-2025
50%
Expanding
40%
30%
20%
10%
0%
-10%
Declining
Tajikistan
Uzbekistan
Turkmenistan
Turkey
Kyrgyzstan
Azerbaijan
Albania
Macedonia
Kazakhstan
Slovakia
Bosnia and Herzegovina
Poland
Slovenia
Czech Republic
Croatia
Armenia
Moldova
Hungary
Estonia
Romania
Lithuania
Russian Federation
Latvia
Belarus
Serbia and Montenegro
Source: UN Population Prospects
Georgia
Bulgaria
-30%
Ukraine
-20%
26
The share of working age population to total population is
expected to decline rapidly after 2015 in the EU-8,
Southeastern Europe and the middle income CIS
countries, a pattern similar to that in the EU-15, better
than Japan but worse than USA
Working Age Population to Total Population in Selected Country Groups, 1950-2050
75.0%
70.0%
65.0%
60.0%
55.0%
50.0%
1950
1955
1960
1965
1970
1975
EU8
1980
SEE
1985
1990
1995
2000
Middle Income CIS
2005
2010
EU15
2015
USA
2020
2025
2030
2035
2040
2045
2050
Japan
EU8 = Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia
Middle Income CIS = Belarus, Russian Federation, and Ukraine
SEE = Bosnia, Bulgaria, Croatia, Macedonia and Romania
Source: UN Population Prospects 2004; WB staff estimates
27
Maintaining the share of working age population in total
population in 2025 at current levels through extra immigration
alone would require increases in the share of the immigrant
population outside the range of historical experience,
particularly in Central Europe, Bosnia, Bulgaria and Romania
Changes in Migrant Share of Population Required to Maintain the Share of the Working Age Population to Total
Population in 2025 at current Levels
450%
16%
Share of additional migration needed as a percentage of current migation stock (left scale)
Current migrant stock as a percentage of total population in 2000 (right scale)
400%
14%
350%
12%
300%
10%
250%
8%
200%
6%
150%
4%
100%
2%
50%
Ukraine
Russian Federation
Macedonia
Croatia
Poland
EU15
Serbia and Montenegro
Source: UN Population Prospects, 2004, International Migration, 2002
Romania
Hungary
Bulgaria
Bosnia and
Herzegovina
Czech Republic
Slovenia
0%
Slovakia
0%
28
Maintaining the share of working age population in total
population in 2025 at current levels by intensifying labor
force participation alone would require very large increases
in the labor force participation rate, particularly in Central
Europe and Croatia
Change in Labor Force Participation Rates Required to Maintain the Share of the Working Age Population to Total
Population in 2025 at current Levels
20%
90%
Share of additional LFPR needed as a percentage of current level of LFPR (left scale)
18%
Current Labor Force Participation Rates in 2000 (right scale)
80%
16%
70%
14%
60%
12%
50%
10%
40%
8%
30%
6%
20%
4%
*Data for Bulgaria is available for 2003
Source: UN Population Prospects, , Labor Force Survey (LABORSTA)
Lithuania
Romania
Macedonia
Ukraine
Serbia and
Montenegro
Slovakia
Bulgaria
Latvia
Estonia
Russian Federation
EU15
Poland
Hungary
0%
Czech Republic
0%
Croatia
10%
Slovenia
2%
29
The Presentation
1. GDP Growth and its Components
2. Growth of Labor Productivity and
its Correlates
3. Job Creation and its Correlates
4. The Business Environment facing
Firms
5. The Demographic Challenge
6. Conclusions
30
Conclusions
 Economic growth and poverty reduction in the transition
countries since 1998 have been driven more by increases in
real wages, reflecting growth in labor productivity, than job
creation
 Entry of new firms and exit of obsolete firms are important
for the growth of labor productivity in the transition
countries.
 Entry of new firms is important for job creation as well as
productivity growth in the transition countries. Whereas
new firms have expanded employment, existing firms have,
on average, improved productivity by downsizing and
shedding labor (“defensive restructuring”).
31
Conclusions (cont.)
 While the business environment has been improving in the
transition countries as a whole, it continues to be more challenging
in the transition countries (esp. SEE and CIS) than in the cohesion
countries of the EU, and particularly so for those firms which are
important for productivity growth and job creation, viz, de novo
firms compared to state and privatized firms.
 The business environment also potentially retards the exit of stateowned and privatized firms relative to de novo firms through higher
tolerance of arrears and subsidies, also impeding productivity
growth.
 Looking ahead, continued improvements in the business
environment, particularly a level playing field for de novo firms, as
well as exit mechanisms for obsolete firms, will be critical for
productivity growth and job creation and call for reform of
competition policy, the regulatory regime and institutions, such as
the court system, which protect property rights.
32
Conclusions (cont.)
 Redistribution of land still under collective farms/agricultural
enterprises to peasant farms, together with on-farm technology
transfer and better integration of the rural economy into labor
and credit markets, will be required to improve yields and
agricultural labor productivity in the low income CIS countries.
 Rapid aging of the population in Central and Southeastern
Europe, as well as Russia and Ukraine, if not offset by
accelerated growth in labor productivity, will require policies to
facilitate a combination of, rather than sole reliance on additional
immigration, intensification of (currently low) labor force
participation and delayed retirement. Failure to do so and also to
boost labor productivity growth through new investment will
derail convergence towards EU-15 living standards.
33
References
 Erik Bartelsman, John Haltiwanger and Stefano Scarpetta (2004), Microeconomic
Evidence of Creative Destruction in Industrial and Developing Countries, World
Bank Policy Research Working Paper No. 3464
 David Brown and John Earle (2004), Economic Reform and Productivity
Enhancing Reallocation in the Post-Soviet Transition. Upjohn Institute for
Employment Research, background study for World Bank (2005b)
 EBRD-World Bank Business Environment and Enterprise Performance Surveys
1999, 2002, 2005
 Karen Macours and Johann Swinnen (2004), Rural Poverty in ECA, background
study for World Bank (2005a)
 World Bank (2005a), Growth, Poverty, and Inequality: Eastern Europe and the
Former Soviet Union
 World Bank (2005b), Enhancing Job Opportunities: Eastern Europe and the
Former Soviet Union
 World Bank (2006), The Third Transition: From Red to Gray (forthcoming)
34