sou · GWB3105EN · 2009-01-01 00:00:00 — In the new pension system, the retirement age is flexible and wage earners have the right to stay on the job until aged 67. Retirement at 65 is still very common, but it cannot be ex- plained by financial incentives.75 The norms concerning the retire- ment age are strong although there are indications that they are beginning to loosen. Thus far the average retirement age has remained relatively unchanged while the spread in retirement ages has increased. The dissolution of the norm thus appears to promote both lower and higher retirement ages. In other words,, it may have become more socially accepted to start collecting a pension both late and early. If relaxing the norm means that early retirement will be all the more common, there could be major consequences for financing welfare services and pensions. How- ever, as shown earlier in this chapter, the percentage of 60–64-year olds taking early retirement increased substantially more than the percentage of their income coming from this source. Rather, income from supplementary pension schemes in particular, but also from private pensions, has increased. 73SIFO [2005]. 74National [2001c]. 75Ministry Publication Series Ds 2007:21. Increasing the Labour Supply The Long-Term Survey 2008 An earlier entry into the labour market and a later exit could provide a considerable boost to the number of hours worked. A stronger growth in the labour supply than found in the Surveys base scenario could increase growth and improve the for financing development of the welfare services in the future. Labour market entry is closely connected with the duration of education and the education systems efficiency. As for young peoples level of education, there are two diverging trends. The percentage of young people with a higher education is growing but at the same time the percentage of young people with only a pre- upper secondary education remains . people who lack an upper secondary education find it more difficult to get established in the labour market. Since the percentage of young people without an upper secondary education is relatively , there is a risk of creating a large group with a weak foothold in the labour market. There is a strong argument that early initiatives in the schools are most effective to counter failure at school. University studies in begin late and take a long time. Changing this would help increase the number of hours worked with relatively high productivity. Inefficient use of the time devoted to getting an education is costly not only for the public purse but also for individuals, whose life income is sharply reduced. In view of Swedish university students older age and long road through the education system, it is worth considering the introduction of financial incentives of some kind via fees and premiums in the student support system. To reduce the risk of the fees leading to recruitment that is more socially skewed, it could be possible to borrow the fees or introduce a system of grants.76 Since education takes time and structural change is rapid, it is difficult, but not impossible, for society to steer individuals to choose the right university education.77 Nevertheless, it is important to improve the information to make it possible for the individual to make informed decisions. With clear, simple and objective information and expanded study and vocational guidance relatively early in the education process, the public sector could, 76Appendix 7 to the Long-Term Survey 2003/04 (SOU 2003:57). 77Appendix 8 to the Long-Term Survey 2008 (SOU 2008:69). The Long-Term Survey 2008 Increasing the Labour Supply with modest resources, achieve a more efficient and less costly education system. In addition, society can and should use various tools to create the incentives that both encourage people to get an education and induce schools, colleges and universities to offer good education. Longer life expectancy has resulted in a longer retirement. To increase the financial incentives to older people to work, the state has implemented reforms in a number of transfer systems in recent years. As for pensions, the reformed pension system should ensure the balance between revenue and expenditure. In view of demo- graphic trends, it is reasonable to consider the need for further measures before the full effects of the new pension system can be evaluated. One example of measures that have been implemented in other countries is the adjustment of age limits in the old age pension system to average life expectancy. This should also be considered in . Likewise, the rules for the guarantee pension and housing supplement scheme for pensioners should be reviewed. At the same time any such review must take into consideration the distributional effects of a change in the regulatory regime. Most people exit the labour market via systems other than the state old age pension system. In order to raise the exit age, it is therefore important to take into account the financial incentives and norms in all the relevant systems, not just the state old age pension system. The age limit for claiming private and collective pension savings is often considerably lower than the limit in the old age pension system. Consideration can be given to whether it would be appropriate for the state to try to influence these age limits, for example, via the tax system. 4 Good Productivity Growth Productivity developments have been of great importance in the development of welfare in . In the past fifty years, there has been only a marginal increase in the number of hours worked in while productivity has more than quadrupled. Productivity growth varies from one industry to another and from one period to another. Since the beginning of the 1990s, productivity growth in has been good. The scenarios for the Long-Term Survey 2008 summarised in chapter 2 assume that growth will continue to be healthy in the years ahead. Owing to increased demand for services in the economy, there will be a shift in employment from manufacturing to the service sector. Productivity growth is higher in manufacturing than it is in the service sector. Consequently, the shift in employment means that there will be more production in service industries having relatively weak productivity growth. But the effect of productivity in the economy as a whole is unclear. Services are often used as an input in other industries production and thereby affect produc- tivity growth in other industries. A number of factors affect productivity growth, including macroeconomic stability, education level, access to risk capital, research and development, conditions for entrepreneurs and busi- ness people, and competition. Thus a policy aimed at promoting good productivity growth must take a broad approach and have a general orientation. 4.1Productivity growth varies substantially Productivity gains are of great importance for the long-term development of welfare, both historically and in the future. The Long-Term Survey 2008 Productivity gains mean that economic resources are used in an increasingly efficient . Productivity can be measured in various ways. In this chapter, primarily labour productivity, the value added per hour worked, is used as a measure of productivity. At the same time, one should be aware that there are substantial problems associated with measu- ring productivity growth, particularly industry level growth; see fact box 4.1. This chapter discusses only business sector produc- tivity, while productivity in the public sector is considered in chapter 7. 4.1.1Healthy productivity growth since the early 1990s Productivity growth in has varied over time. After the strong productivity gains of the 1950s and 1960s, productivity growth in weakened during the subsequent two decades. Low productivity growth during the devaluation policy of the 1980s Macroeconomic instability marked most of the 1980s. Public finances deteriorated, inflation was high and the economy suffered several cost crises. To meet the cost crises, a devaluation policy was pursued and as a result, industry in the short term experienced strong competitiveness. But in the long term, the pressure on enterprises to change lessened, owing to the drop in the cost of labour (real wages) compared with the cost of machinery. , the incentives to replace labour with new and new invest- ments and rationalisations declined, resulting in less productivity growth.80 ... followed by high productivity growth after the crisis in the 1990s In the beginning of the 1990s, the devaluation policy was aband- oned and the krona was pegged to the then currency unit of the EU (the ECU). This led to lower inflation but also resulted in sharply rising real interest rates. Together with an international economic slowdown, this contributed to rapidly falling demand 80 ,K. [1993]. The Long-Term Survey 2008 and rising unemployment in the economy. At the same time, public finances deteriorated sharply, owing to the rising unemployment and the developing banking crisis. The public sector was forced to rationalise, resulting in still more unemployment.81 As a result of the deep economic crisis, GDP fell three years in a row. An extensive elimination of production resources took place at which time mainly less productive production disappeared. One consequence of rationalising away a not inconsiderable part of the labour force in a short time was a rapid increase in productivity. As the fall in employment affected those with a low level of education more than the well educated, the change in direction to a higher proportion of well-educated people may have boosted the produc- tivity increase. At the same time, it may have involved permanent exclusion of parts of the labour force, since even now the employ- ment rate is lower than it was before the crisis of the 1990s. In that event, it would mean that the positive growth effect of the productivity gain was overestimated if the productivity increase is partly due to lower employment. In order to estimate the impact on growth, both effects have to be taken into account. To some extent, the increase in productivity after the crisis can be explained by the cyclical effect brought on by the recovery. But the healthy productivity growth has lasted well into the 2000s, although it has moderated in recent years (figure 4.1). One factor contributing to the strong productivity gains was the abandonment of the devaluation policy. This increased the pressure for change in the business sector and, together with a policy aimed at low inflation and stable public finances, it has contributed to more stable macroeconomic development and lower interest rates. Most indications are that internationalisation, information technology (IT) developments, innovation and the deregulation of the product markets also account for the positive growth For more than ten years, productivity gains in the business sector in have also been good by international comparison. This is true of both the business sector in general and many individual industries, including many service industries. The recent slowdown in productivity does not affect this assessment. According to ,82 productivity grew by 3.5 per cent in 2006, declined by 0.5 per cent 81Södersten, B. & Tson , H. (eds.) [2004]. 82National [2008]. The Long-Term Survey 2008 in 2007 and is expected to fall by an additional 0.5 per cent in 2008. The Long-Term Survey estimates that the short-term downturn in 2007 and 2008 is largely cyclically induced rather than structural and productivity in the next few years is expected to approach a long-term productivity growth of about 2.5 per cent a year for the business sector.83 Figure 4.1 Labour productivity in , the EU-15 and the (all parts of the economy) 1980–2005 Note: Labour productivity is defined as the value added per hour worked. EU KLEMS is an EU financed project which is to develop comparable time series for national accounts from 1970 onwards. EU KlLEMS has data for 47 industries. information and data series are available on the projects website: . Source: EU KLEMS. 83 [2008]) also believes there will be a recovery and forecasts productivity growth of 1.6 per cent for 2009 and 3.5 per cent for 2010. The Long-Term Survey 2008 4.1.2Productivity growth varies from industry to industry84 Average productivity growth is higher in manufacturing than in the service sector (table 4.1). Productivity growth in manufacturing has been particularly strong in electronics and optical equipment, which includes telecommunications products. Table 4.1 Growth in the number of hours worked and labour productivity 1980–2030 Agriculture, forestry, Electricity, gas, heating, Wholesale and retail trade (including leasing) hotels, restaurants), education, care* Note: Labour productivity is measured as value added per hour worked. The historical values are calculated on the basis of trend estimates while the projections refer to the average difference between the actual value in 2005 and the estimated equilibrium value in 2030. *Since in EU KLEMS, personal services, education, care, and business also include public production, they have been estimated separately based on Accounts. Source: EU KLEMS, Statistics [e] and calculations. 84 There is a more detailed description of productivity gains in Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108), where the scenarios are presented. The Long-Term Survey 2008 Productivity in the electronics and optical equipment industry has been on an upward trend, growing at about 11 per cent a year between 1980 and 2005, which is the highest growth rate in the private sector. Since the 1990s, there have been strong productivity gains in this industry (figure 4.2). Major technological develop- ments account for this productivity growth. Figure 4.2 Productivity growth in the electronics and optical equipment industry, manufacturing and the business sector 1981–2005 Electronics and optical equipment TFP Electonics and optical equipment Note: TFP is an abbreviation of total factor productivity, described in more detail in section 4.3. Before 1993, productivity growth in electronics and optical equipment was stated as an average of the productivity growth for the manufacture of machinery (SNI Swedish Standard Industrial Classification 29), elec- tricity and telecommunications products (SNI 30-33) and the vehicle manufacturing industry (SNI 34). Source: EU KLEMS and Statistics [e] for the business sector. Even though productivity growth in the service sector is, on average, lower, there are several service industries in which productivity growth is at least as high as it is in manufacturing. Post and telecommunications has had the highest productivity growth at almost 6 per cent a year since the beginning of the 1980s. The Long-Term Survey 2008 Productivity gains in business services (including leasing) have, however, been weak. For many service industries, the construction industry being one exception, productivity growth after 1990 exceeded that of the 1980s. Compared with the and the EU, productivity growth in many service industries in has been good in the past decade.85 At the same time it is difficult to measure, and thus to compare, productivity gains in different industries; see fact box 4.1. Fact Box 4.1 Difficult to measure productivity There are significant problems associated with measuring productivity gains, not least with respect to individual industries. When different parts of the economy are compared, the extent of the measuring problem is affected by whether the problems are bigger in some industries than in others and if this difference changes over time. One problem is the change in products owing to technological development and improvements in quality. When calculating productivity, production development must be calculated as though there were no changes in quality. For example, to be able to compare production per hour at different points in time, technological development has to be frozen to avoid comparing apples and . Statistics accomplishes this by creating quality neutral prices and value weights. Using televisions as an example, this means that when the old cathode ray television is exchanged for a new flat screen television, the technological change is captured by using a value weight that measures the value of production instead of the number or the weight in kilos. This method means that a flat screen television is equivalent in value to two old televisions. By using value weights, Statistics can create a quality neutral price. It goes without saying that quality and technological change are very difficult to estimate as volume changes (how many old televisions are equivalent to a new flat screen television?). The estimates are particularly problematic for products where technological change happens very rapidly. In order to estimate technological and qualitative changes, Statistics sends questionnaires to manufacturers. The weak productivity gains in some service sectors, not least business services, may at least in part be due to measurement problems. For many of the business services, there is a high degree of differentiation, which makes price and quality comparisons difficult. The more knowledge intensive business services are also often individually adapted to the client, which naturally makes price comparisons even more difficult. The weak productivity gains for these 85 In international comparisons of productivity gains in the service and other industries, productivity per person employed is sometimes measured. See for example , S. (ed.) [2007]. If so, gains in several Swedish service industries will be worse than if productivity is measured per hour. One explanation for the difference is that average working hours differ from country to country. The Long-Term Survey 2008 services could be at least partly due to underestimating quality improvements and the consequent overestimation of price trends. Overestimating price trends in certain services (or products) does not necessarily result in large errors in estimating productivity growth in the economy as a whole. This is true since many of the services, particularly business services, are used as inputs in manufacturing. If measurement is a bigger problem for services than for other products, too large a part of the total productivity growth will be attributed to manufacturing and too small a part to service industries. Structural change affects productivity gains Structural change means that some industries grow and some contract and this change is significant for productivity gains throughout the economy.86 Structural change can lead to an in- crease in productivity either by labour moving to activities with higher productivity levels, the static effect, or to activities with higher productivity growth, the dynamic effect. In addition there is an in effect that depends on factors in the industry or firm and that explains the rest of the productivity growth. The in effect explains most of the productivity growth from 1975–2004.87 Employment, relative to other industries, has not increased after 1990 in industries with higher productivity or higher productivity growth. Even at the corporate level, the contribution from the dynamic and static effects of the structural change to productivity growth was small between 1997 and 2003.88 Analyses of the importance that entering and exiting firms have for productivity growth in manufacturing have arrived at partly different results.89 The relatively short time span analysed could explain why some studies of do not find any major 86See also chapter 5 for a discussion of the pace of structural change in the economy. 87Lind, D. [2007]. The analysis is based on data from EU KLEMS at the two digit level in accordance with the Swedish Standard Industrial Classification (SNI). [2003] shows in an earlier study of manufacturing that with the exception of the tele- communication products industry, the dynamic effect made a negative contribution to productivity growth after 1990. 88Andersson, L-F. [2006]. The analysis is based on individual and corporate data bases from (). Firms with less than one employee and sole proprietorships (where the owner is not counted as employed) have been excluded from the analysis. 89Hedén, Y. [2005] finds that from 1990 to 2000, 40 per cent of the increase in labour productivity and 50 per cent of the increase in total factor productivity came from starting new firms and closing others. & , P. [2007] find that existing firms were responsible for 85 per cent of productivity growth from 1997 to 2002. The Long-Term Survey 2008 contribution to productivity growth from changes in employment in the industries investigated.90 The new firms importance is primarily evident in the long term. In the short term, the impact on economic growth can be expected to be less. International studies extending over longer periods find a higher correlation between corporate dynamics and productivity growth.91 The rise in demand for services has resulted in a steady increase in the number (and proportion) of hours worked in the service sector, while the number of hours worked in manufacturing has declined. Business services are definitely the fastest growing service industry and the most rapidly growing parts of the business services industry are research and data processing services. The number of hours worked there more than doubled between 1993 and 2005.92 The increase in employment in business services is not unique to . It can also be found in most countries. Productivity growth has generally been weaker in the service sector than in manufacturing. It is therefore not very surprising that studies have had difficulty substantiating that the structural change to more production of services has made a positive contribution to productivity. In the long term, this change may lead to lower productivity growth in the economy as a whole, but it is not a foregone conclusion since services as inputs in other production have increased. Section 4.2 has a more in-depth discussion about what importance service industries may have for productivity in other parts of the economy. It is also important to point out that there is no basis in the statistics for the conclusion that productivity growth would have been higher without the structural change. Employment is also increasing in industries with the services most consumed by households. In particular, the personal services industry, an industry in which productivity gains have been weak, is growing. Increased employment in industries that have weak productivity growth and make products consumed by households without question contributes to lower productivity growth in the economy as a whole. Even though the impact on productivity growth is negative, this does not mean that the growth is necessarily negative from a welfare point of view. 90Karlsson, C. & , K. [2007]. 91Ahn, S. [2001]. 92EU KLEMS and calculations. The Long-Term Survey 2008 increased demand for personal services from households reflects changes in household preferences. Many of the services provided by the public sector are similar to personal services in that they are primarily consumed by house- holds and productivity growth is weak. Public service productivity is discussed in chapter 7. Table 4.2 Structural change in the business sector 2005–2030 Agriculture, forestry, hunting and fishery Electricity, gas, heating, water, and Source: Statistics and calculations. The proportion employed in the service sector continues to increase The scenarios in the Long-Term Survey assume that the healthy productivity growth since the beginning of the 1990s will also continue in the future. Productivity growth in manufacturing is assumed to be unchanged and to increase by 3.8 per cent per year on average.