sou · GWB3105EN · 2009-01-01 00:00:00 — This is despite the assumption of clearly lower produc- tivity growth in the electronics and optical equipment industry. For most other manufacturing industries, productivity growth is assumed to be about the same as it was from 1980 to 2005. Continued deregulation of services, not least in the EU, will increase international competition in the service sector. Since the service sector is still relatively highly regulated, there is consider- able potential for better regulations both in and inter- The Long-Term Survey 2008 nationally.93 The implementation of the Directive is thought to have an effect on both international competition in the service sector and on GDP.94 In light of this, it is assumed in the base scenario that produc- tivity growth in the business services industry (including leasing) will be higher in the future than during the past 25 years. The increase in productivity in the industry in recent years also indicates that this is likely. This also is true of the transport industry, which is also assumed to have higher productivity growth in the future. The increasing demand for personal services will lead to an increase in the proportion of people employed in the industry in the years ahead. Both the level of productivity and productivity growth are expected to continue to be low in this industry. The increasing demand for welfare services anticipated by the Survey will contribute to an increase in the share of the workforce employed in the public sector and a corresponding decrease in the private sector. With employment in the service sector increasing, future productivity growth in the business sector as a whole is expected to be somewhat lower: 2.3 per cent a year compared with 2.5 per cent a year over the last 25 years. 4.2Services affect productivity in other industries With the increase in employment in the service sector, the question arises as to whether this will lead to lower economic growth in the long term. Up to the beginning of the 2000s, the productivity level was higher in the service sector than in the product sector. Thus the earlier shift in employment from the product sector to the service sector contributed to higher productivity in the economy as a whole. But for the last few years, the productivity level has been lower in the service sector than in the product sector. Since a large part of the services are used as an input in other production, this shift in production towards the service sector may yet contribute to more efficiency in the economy as a whole. 93OECD [2008d]. 94Kox, H., Lejour, A. & Montizaan, R. [2005] and Economics [2005]. The Long-Term Survey 2008 4.2.1The increasing importance of business services as an input in industry The purchase of services as a percentage of the value of production has increased in manufacturing. Business services, particularly the group other business services, have increased their share of the input in manufacturing firms (figure 4.3). Included in other business services are cleaning, telecommunications, employment agencies, recruitment, architect services and security services; see fact box 4.2. The share of input attributable to R&D services has also increased somewhat. The use of other services (transport, communications, trade, financial services, hotels and restaurants) as manufacturing inputs has grown at approximately the same pace as the increase in production and hence their share of input is relatively unchanged. Figure 4.3 Business service inputs as a percentage of total production 1995 and 2003 Electricity, gas, Source: Statistics [e] and calculations. The Long-Term Survey 2008 The percentage of business service inputs has increased in all product sectors except coal and products. Business service inputs as a percentage of the value of production have increased more in manufacturing than in the service industries. In this connection, it is worth noting that the most rapidly growing industries in manufacturing (chemicals and electronics and optical equipment) are also the industries in which the percentage of business service inputs has increased the most. The shift in work from manufacturing to service companies can only partly account for the increase in the production of business services. Another explanation is the increase in the service content of products, particularly the knowledge content. Among the indications that this is the case is the fact that while employment in manufacturing has declined, the percentage of those employed in manufacturing firms that have service-related work tasks has increased. This increase has thus been taking place at the same time that the number of people employed in business services has increased and manufacturing firms have increased their purchases of business services. The service content of consumption and production in manufacturing has increased considerably.95 The relative price changes between product inputs and service inputs are another explanation for the rise in the percentage of service inputs. The high productivity in the production of a number of goods has meant that business services have become more expensive compared with other inputs. This may have contributed to the rise in business service inputs as a percentage of the value. 95 Kox, H. & Rubalcaba, L. [2007]. The Long-Term Survey 2008 Fact box 4.3 Leasing and business services in a statistical perspective SNI (Swedish Standard Industrial Classification 2002 71Leasing of machinery and equipment without operator and of personal and household goods 72Data processing and related activities 741 Legal and financial consultant activities, holding activities 742 Architectural and activities and related technical consultancy 743 Technical testing and analysis 745 Labour recruitment and provision of personnel 746 Investigation and security activities 748 Miscellaneous business activities 4.2.2Importance of business services for productivity in other industries Moving work tasks out of manufacturing into the service sector affects productivity in all parts of the economy. This move can contribute to more specialisation and economies of scale in the production of different services. It may contribute to higher productivity growth throughout the economy even though it may appear from the statistics that the move contributes to growth in industries with low productivity growth while industries with higher productivity growth contract. Services as inputs may also have indirect effects on productivity in those industries that use them, for example, by the transfer of knowledge. They may do this even though they are not reflected in economic transactions. Indirect effects may also arise if the service being used as an input is improved and does not increase in price. Under pricing may be the result of the market structure for some knowledge products and occur, for example, during an economic slowdown. Analyses of the indirect effects of business services on productivity by various forms of spillover effects are incomplete and rather fragmented. But it is relatively clear that IT services have The Long-Term Survey 2008 positive effects on productivity gains in other industries. For other business services, a study cautiously concludes that the growth in business services in the 1980s had positive spillover effects on productivity in the economy as a whole. According to the study, it appears that business service firms at that time did not want to or could not charge prices equivalent to the value of the services to the purchaser. Developments in the 1990s had more mixed results.96 4.3Productivity is determined by investment, labour force skills and technological developments In the long term, the determinants of productivity are the quality of the labour force and capital, the way in which capital intensity develops in production and technological developments in a broad sense. Investments in different types of real capital and in education, together with measures that promote technological development, are therefore important for long-term productivity gains. In the statistics, gains in labour productivity can be classified as changes in real capital, human capital and technological development. In practice, this division is an attempt to estimate the contribution from changes in IT capital, other real capital and the composition of the labour force. That part of the change in labour productivity not explained by these three factors is called total factor productivity.98 It is often used as a measure of the contribution from technological development in the broad sense, a factor that cannot be measured directly. Increased real capital and technological development have been the most important factors in productivity gains in for more than ten years and together represented two thirds of the 96Kox, H. & Rubalcaba, L. [2007]. 97See also appendix 1 to the Long-Term Survey 2008 (SOU 2008:108) for a detailed description of methods for analysing productivity gains and various data sources. The growth accounting method applied in this section has in recent years been used in a number of studies to analyse productivity gains as, for example, in appendix 6 to the Long-Term Survey 2008 (SOU 2008:14) or Skytesvall, T. & Hagén, H-O. [2008]. 98In growth accounting, which is based on Solows growth model (Solow, R. [1957]), technological development is a residual often called total factor productivity. The change in total factor productivity is usually defined as the increase in production minus a weighted average of the increase in factory inputs. The Long-Term Survey 2008 productivity growth in the Swedish business sector between 1994 and 2005 (figure 4.4). IT capital contributed a fifth while changes in the composition of the labour force with more well educated workers contributed to a lesser extent. There are large differences in how various industries contri- buted to total productivity growth in the economy. There are also large differences between industries in what contributed the most to the industrys productivity growth. The increase in total factor productivity in the telecommunications products industry explains a substantial part of the total productivity growth over the last ten years. Figure 4.4 The contribution of productivity to the total economy, average per year 1994–2005 Source: EU KLEMS and calculations. Also in the service sector, there are large differences between industries in the factors that contributed to productivity growth. The Long-Term Survey 2008 Productivity growth in business services has been weak, even though it has improved in the last decade. The weak growth is due to the negative growth in total factor productivity in the industry in the last decade (figure 4.5). Here it should be noted that it is difficult to measure both price and quality developments in this industry; see fact box 4.1. In several service industries, investment in IT and other capital has been important in accounting for productivity growth in the last decade. In the financial industry (credit institutions and insurance), the changes in the composition of the labour force in the direction of more well educated workers have also made a positive contribution to productivity growth. Figure 4.5 The contribution of productivity in service industries, average per year 1994–2005 0 -1 -2 retail trade, hotels, Source: EU KLEMS and calculations. The Long-Term Survey 2008 In the and a number of EU countries, increased use of IT capital and a well educated labour force have made a substantial contribution to the labour productivity increase in the service sector. At the same time, the differences in labour produc- tivity between countries are not solely explained by differences in these factors. Instead the countries with the highest growth characteristically have relatively strong total factor productivity growth.99 4.3.1Investment is important for productivity growth and better capital accounts for around half of the productivity growth in the business sector. Providing the labour force with a larger amount of capital has led to an increase in labour productivity. Investment in real capital affects productivity in the business sector in two ways. It both increases capital in relation to the number of hours worked, i.e. increases capital intensity, and it supplies production with new technology as new capital replaces old. The real capital stock in the form of machinery and has historically grown as a result of investment. Investment is necessary to replace worn out capital and to make the introduction of new economic activities possible. Low investment results in failure to replace and at the same pace as they wear out, i.e. the capital stock decreases; likewise, major invest- ment results in the growth of the capital stock. 99 Inklaar, R., Timmer, M.P. [2008]. The Long-Term Survey 2008 Figure 4.6 Capital ratio 1980–2005 Note: The capital ratio is the capital stock divided by GDP. Before 1993 capital stock is calculated according to the Perpetual Inventory Method (), i.e. the value of the stock is calculated with the help of assumptions about investment and depreciation rates based on an observed initial value. Source: EU KLEMS and calculations. The Swedish capital stock grew more rapidly than GDP from 1980–2005 (2.6 per cent annually compared to 2.2 per cent). The capital ratio100 was somewhat higher in the first half of the 2000s than in the 1980s (figure 4.6). The sharp increase in the capital ratio during the recession in the early 1990s is more a reflection of the fall in GDP than of high growth in the capital stock. Likewise, the declining capital ratio at the end of the 1990s primarily reflects the sharp recovery in GDP growth. During this period, private capitals share of the total stock relative to the public sectors share has risen. The reduced public capital ratio is due to the decrease in local government capital stock in relation to GDP while the central government capital stock has remained . Between 1980 and 2005, the capital ratio was about 2.3. In the base scenario, this relationship between capital stock and GDP is also 2.3 in 2030. The scenarios in the Long-Term Survey assume that in the long term, the private capital stock grows at the same pace as the private sectors value added. Since local government expenditure is linked to its extensive responsibility for health care, 100 The capital ratio is the capital stock divided by GDP. The Long-Term Survey 2008 schools and social services, local government consumption is assumed to have some impact on the growth in the local government capital stock. Some of the incentives for the growth of the central government capital stock are assumed to be different, as the major part of central government investment is used for infrastructure. Therefore the scenarios assume that the central government capital stock grows at the same pace as GDP. Financial markets affect investment According to empirical studies, the way in which the financial markets operate has a significant effect on the level of investment over and above the cost variables.101 The explanation for the finan- cial markets impact on investment is that companies, particularly small companies, often encounter a liquidity restriction. In addi- tion, small companies in highly industrialised countries have limited access to credit in the financial markets and consequently their investment decisions are dependent on their liquidity. IT capital makes a relatively large contribution to productivity in Part of capitals contribution to the productivity increase in , particularly in the latter part of the 1990s, has been due to a higher percentage of IT capital in production. IT contributes to increased productivity both because companies in every sector invest in IT capital and because productivity growth is higher in IT than in other sectors. The rapid technological development in production using IT capital has at the same time contributed to lower prices for IT equipment. The contribution to productivity from IT capital in and the was higher than the EU average (figure 4.4). But IT capitals importance for productivity growth appears to have declined somewhat in the 2000s. Lower growth in the IT sector in recent years is the likely explanation. 101Appendix 5 to the Long-Term Survey 2008 (SOU 2008:12). The Long-Term Survey 2008 4.3.2The quality of the labour force is important for productivity The quality of the labour force affects productivity. The labour forces level of formal education is often used as a measure of its quality, even though several studies use additional factors such as sex and age.102 According to the theory, a well educated person contributes more to the increase in value added than a person with less education.103 The increase in the proportion of well educated people has contributed to higher productivity In , the percentage of hours worked by those with a post- secondary education has increased since the mid-1990s. This can be partly explained by the weak labour market in during the 1990s and the simultaneous rapid increase in the number of places in post-secondary education. This development has led to a change in the composition of the labour force with an increase in the proportion of well educated workers. The composition of the labour force is also changing as considerably more of the younger people now entering the labour market have a post-secondary education compared to the older workers leaving the labour force. The change in employed peoples education profile has contributed to productivity growth in the past ten years.104 The contribution to productivity from changes in the composition of the labour force has been somewhat higher in than in the and higher than in the EU 15 between 1995 and 2005 (figure 4.4). In manufacturing, the increase in those with a post-secondary education has made a small, positive contribution in all industries. The electronics and optical equipment industries have experienced the largest contributions from changes in the education profile in the manufacturing sector. The changes in composition have made a positive contribution to productivity growth in all service industries, but they have clearly been most important in the 102Appendix 6 to the Long-Term Survey 2008 (SOU 2008:14), , Ho, M. & Stiroh, K. [2007], van Ark, B., OMahoney, M. & Ypma, G. [2007]. 103Appendix 6 to the Long-Term Survey 2008 (SOU 2008:14). 104Appendix 6 to the Long-Term Survey 2008 (SOU 2008:14). The Long-Term Survey 2008 financial industry (figure 4.5). In business services, there are large differences from one service to another. A rough division accor- ding to education level shows that in business services employing a larger percentage of workers with a post-secondary education, the number of hours worked is about double that of business services having more employees with education.105 But in the last decade, the number of hours worked increased substantially more in business services with a relatively large percentage of workers with education. Higher education will continue to contribute in the future If the percentage of people completing a post-secondary education continues to increase, the changes in labour force composition towards a larger proportion of labour with higher productivity will accelerate. In addition, as a result of the generation shift, the proportion of workers with a higher education will increase even if the percentage of young people graduating from university is unchanged from the current level. How much a continued increase in the proportion of university educated workers will affect productivity is unknown and also difficult to estimate based on historical developments. Studies made of the effect of a university education on productivity are based on situations in which many fewer individuals had a univer- sity education. In a situation where an increasing number of people are pursuing a university education, the quality of the graduates (or the level of education) may possibly change. A rising proportion of university graduates will push up the productivity level, but at the same time it may mean that the contribution to productivity growth will decline when the percentage of university graduates increases. In order for a higher percentage of university graduates to have an effect on productivity, the increase in the supply of graduates must also correspond to an increase in the demand for this very category. Research studies indicate that technological develop- ments and internationalisation mean that the demand for graduates will increase in the future. 105Under the Swedish Standard Industrial Classification, this applies to industries (SNI) 72, 73, 741–744. P. and others [2007]. The Long-Term Survey 2008 All in all, it is difficult to draw definite conclusions about how much the education level affects the productivity level and productivity growth in the long term.107 The productivity gain from more people taking a university education must also be weighed against the cost of the education and the cost in the form of a lower labour supply during the study time. How education affects labour market entry is discussed in detail in chapter 3. A good basic education is important for everyone For various reasons, a substantial proportion of the population will also lack a university education in the future. How the human capital in this group is developed will also be important for productivity growth. Even though the average productivity of this group is lower than that of university graduates, an increase in the groups human capital means an increase in productivity in the economy. The human capital of those lacking a university education depends both on what education they have and on the skills they have acquired in the workplace. It is essential that compulsory school and upper secondary school provide the knowledge and skills necessary for establish- ment in the labour market. As chapter 3 made clear, the percentage of young people who do not finish upper secondary school continues to be high at the same time that this group has difficulty finding work. Insufficient education, combined with a delayed labour market entry, means that the human capital accumulated declines and the value of what education one actually has declines. This effect evidently persists for several years. Long periods of youth unemployment can therefore have long-term effects on productivity growth in the economy A decline in the number of young people who, for various reasons, do not complete compulsory or upper secondary school would be positive for both the labour supply and productivity growth in the long term. Likewise, measures that contribute to reducing long-term unemployment are important for human capital development and thus for productivity. 107 Appendix 6 to the Long-Term Survey 2008 (SOU 2008:14). The Long-Term Survey 2008 Staff training contributes to productivity, but to what extent is unclear The aim of staff training, which to a considerable extent is company- or – task-specific, is to improve labours skills and it can thus help increase productivity. Staff training results in a continual and extensive upgrading of labour force skills. In 2003 employers staff training costs in came to over billion, of which the training itself cost over billion.108 In the same year, the comparable cost at a university or college came to just under billion.109 About half of those employed participate annually in some form of training paid for by their employer, compared with about 15 per cent of the labour force in the who are given this opportunity.110