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...intermediates, and labour services. The content and scope the database is then briefly described. This is followed by a discussion of preliminary results focusing on comparisons between the EU and US. These confirm the relatively poor productivity performance of the EU relative to the US since the mid-1990s, mostly driven by low productivity growth in market services.
Keywords: Productivity; growth accounting; national accounts JEL Classifications: D24; E01; J24
1. Introduction (1)
The EU KLEMS Growth and Productivity Accounts described in this paper include measures of output growth, employment and skill creation, capital formation and multi-factor productivity (MFP) at the industry level for European Union member states from 1970 onwards. The input measures include various categories of capital (K), labour (L), energy (E), material (M) and service inputs (S). Thus the data are ideally suited to the study of the relationship between skill formation, investment, technological progress and innovation on the one hand, and productivity, on the other. A major advantage of growth accounts is that they are embedded in a clear analytical framework rooted in production functions and the theory of economic growth. They provide a conceptual framework within which the interaction between variables can be analysed, which is of fundamental importance for policy evaluation. The measures are developed for individual European Union member states, and are linked with 'sister'-KLEMS databases in the US and Japan.
The purpose of constructing the database is to support empirical and theoretical research in the area of economic growth and productivity and to inform policy which requires comprehensive measurement tools to monitor and evaluate progress. The construction of the database should also support the systematic production of high quality statistics on growth and productivity using the methodologies of national accounts and input-output analysis.
The layout of the paper is as follows. First we provide an overview of the growth accounting methodology underlying the analysis (section 2). This is followed by a discussion of the data sources and measurement methods (section 3). Section 4 presents an overview of the key characteristics of the database and the variables, country and industry coverage--essentially a user's guide. In section 5 we present an analysis of some of the major trends observed from the March 2007 release of the database. This brief overview paper will in due time be followed by more extensive reviews and research papers, which will also be available from the EU KLEMS website (http:// www.euklems.net). This site also contains more information on the methodology used in EU KLEMS--the document EU KLEMS Growth and Productivity Accounts, Version 1.0, PART I Methodology--with detailed source descriptions given in the document PART II Sources.
2. Growth accounting methodology
2.1 General framework
In this section we summarise the methodology used to develop our measures of industry-level total factor productivity growth. We begin with the industry-level production function and show how this allows us to quantify the sources of output growth. In general, we follow the growth accounting methodology as developed by Dale Jorgenson and associates as outlined in Jorgenson, Gollop and Fraumeni (1987) and more recently in Jorgenson, Ho and Stiroh (2005). We follow their notation as closely as possible. The method is based on production possibility frontiers where industry gross output is a function of capital, labour, intermediate inputs and technology, which is indexed by time, t. Each industry, indexed by j, can produce a set of products indexed by i indicated by the production possibility set g. Each industry has its own production function and purchases a number of distinct intermediate inputs indexed by i, capital service inputs indexed by k, and labour inputs indexed by l. The production functions are assumed to be separable in these inputs, so that:
[Y.sub.j] = [g.sub.j]([Y.sub.ij]) = [f.sub.j]([K.sub.j], [L.sub.j], [X.sub.j], T) (1)
where Y is output, K is an index of capital service flow, L is an index of labour service flows and X is an index of intermediate inputs. Under the assumptions of constant returns to scale and competitive markets, the value of output is equal to the value of all inputs:
[P.sup.Y.sub.j][Y.sub.j] = [P.sup.K.sub.j][K.sub.j] + [P.sup.L.sub.j][L.sub.j] + [P.sup.X.sub.j][X.sub.j] (2)
where [P.sup.Y.sub.j] denotes the price of output, [P.sup.X.sub.j] denotes the price of intermediate inputs, [P.sup.K.sub.j] denotes the price of capital services and [P.sup.L.sub.j] denotes the price of labour services. This expression is evaluated from the producer's point of view and thus excludes all taxes from the value of output, but includes producer subsidies. This is the basic price concept in the System of National Accounts 1993. The inputs are valued at purchasers' prices and reflect the marginal cost paid by the user. Therefore they should include taxes on commodities paid by the user (non-deductible VAT included) and exclude the subsidies on commodities. Margins on trade and transport should be included as well. The measurement of capital services and labour services is discussed in more detail below. It is important to note at this stage that the price of capital services is defined as a residual such that equation (2) holds.
Under the standard assumption of profit maximising behaviour and competitive markets, such that factors are paid their marginal product, and constant returns to scale, and assuming a Translog production function, we can define MFP growth ([DELTA]ln [A.sup.Y.sub.j]) using the Tornqvist index as follows:
[DELTA]ln[A.sup.Y.sub.j] = [DELTA]ln[Y.sub.jt] - [[bar.v].sup.X.sub.jt][DELTA]ln[X.sub.jt] - [[bar.v].sup.K.sub.jt][DELTA]ln[K.sub.jt] - [[bar.v].sup.L.sub.jt][DELTA]ln[L.sub.jt] (3)
Growth of MFP is derived as the real growth of output minus a weighted growth of inputs where [DELTA]x = [x.sub.t] - [x.sub.t-1] denotes the change between year t-1 and t, and [[bar.v].sub.jt] with a bar denotes period averages and [bar.v] is the two-period average share of the input in the nominal value of output. The value share of each input is defined as follows:
[v.sup.X.sub.jt] = [P.sup.X.sub.jt][X.sub.jt] / [P.sup.Y.sub.jt][Y.sub.jt]; [v.sup.L.sub.jt] = [P.sup.L.sub.jt][L.sub.jt] / [P.sup.Y.sub.jt][Y.sub.jt]; [v.sup.K.sub.jt] = [P.sup.K.sub.jt][K.sub.jt] / [P.sup.Y.sub.jt][Y.sub.jt] (4)
MFP indicates the efficiency with which inputs are being used in the production process and is an important indicator of technological change. (2) The assumption of constant returns to scale implies [v.sup.X.sub.jt] + [v.sup.L.sub.jt] + [v.sup.K.sub.jt] = 1 and allows the observed input shares to be used in the estimation of MFP growth in equation (3). This assumption is common in the growth accounting literature (see, for example, Schreyer, 2001). Alternatively, one can perform growth accounting without the imposition of constant returns to scale and use cost shares, rather than revenue shares, to weight input growth rates (Basu, Fernald, and Shapiro, 2001).
Rearranging (3) yields the standard growth accounting decomposition of output growth into the contribution of each input and MFP:
[DELTA]ln[Y.sub.jt] = [[bar.v].sup.X.sub.jt][DELTA]ln[X.sub.jt] + [[bar.v].sup.K.sub.jt][DELTA]ln[K.sub.jt] + [[bar.v].sup.L.sub.jt][DELTA]ln[L.sub.jt] + [DELTA]ln[A.sup.Y.sub.jt] (5)
where the contribution of each input is defined as the product of the input's growth rate and its two-period average revenue share. This decomposition is the basis of the sources of growth results in the EU KLEMS database.
In order to decompose growth at higher levels of aggregation, we also define a more restrictive industry value-added function, which gives the quantity of value-added as a function of only capital, labour and time as:
[V.sub.j] = [g.sub.j]([K.sub.j], [L.sub.j], T) (6)
where [V.sub.j] is the quantity of industry value-added. Value-added consists of capital and labour inputs, and the nominal value is:
[P.sup.V.sub.j][V.sub.j] = [P.sup.K.sub.j][K.sub.j] + [P.sup.L.sub.j][L.sub.j] (7)
where [P.sup.V] is the price of value-added. Under the same assumptions as above, industry value-added growth can be decomposed into the contribution of capital, labour and MFP ([A.sup.V]).
[DELTA]ln[V.sub.jt] = [[bar.w].sup.K.sub.jt][DELTA]ln[K.sub.jt] + [[bar.w].sup.L.sub.jt][DELTA]ln[L.sub.jt] + [DELTA]ln[A.sup.V.sub.jt] (8)
where [bar.w] is the two-period average share of the input in nominal value-added. The value share of each input is defined as follows:
[w.sup.L.sub.jt] = [([P.sup.V.sub.jt][V.sub.jt]).sup.-1][P.sup.L.sub.jt][L.sub.jt]; [w.sup.K.sub.jt] = [([P.sup.V.sub.jt][V.sub.jt]).sup.-1][P.sup.K.sub.jt][K.sub.jt] (9)
In order to define the quantity of value-added, we assume that the production function is separable in intermediate input and value-added. These value-added based measures are used in the summary of the EU KLEMS results presented in section 4 below.
Each element on the right-hand side of equation (5) indicates the proportion of output growth accounted for by growth in intermediate inputs, capital services, labour services and MFP, respectively. Accurate measures of labour and capital input are based on a breakdown of aggregate hours worked and aggregate capital stock into various components. Hours worked are cross-classified by various categories to account for differences in the productivity of various labour types, such as high-versus low-skilled labour. Similarly, capital stock measures are broken down into stocks of different asset types. Short-lived assets like computers have a...
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