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Raising EU Productivity: Lessons from Improved Micro Data

Periodic Reporting for period 1 - MICROPROD (Raising EU Productivity: Lessons from Improved Micro Data)

Reporting period: 2019-01-01 to 2019-12-31

Productivity has slowed down atypically in the developed world. That means that economies on average are not becoming more productive at quite the same speed as they used to. The consequences of this slow down are of utmost importance. Contrary to a long-term trend, the current generation expects that future generations may earn less than they do, raising issues about intergenerational transfers and sustainability of welfare systems across generations. At the same time, the benefits of the small productivity improvements are accruing disproportionately to capital over labour. The distribution of wealth is therefore becoming increasingly and very visibly unequal, a fact that causes societal anxiety and unrest. MICROPROD will explore the roots of the productivity slowdown by generating and applying micro data at the level of individual firms. MICROPROD will synthesize this microeconomic evidence to arrive at macroeconomic policy advice.

The objectives of MICROPROD are fourfold. As firms increasingly act in globally integrated economies and rely on intangible assets, traditional productivity measurement may reach its limits. The first objective is therefore to improve data and methodologies necessary to measure productivity in the 21st century. Aggregate productivity growth stems from productivity improvements within existing firms and from reallocation of economic resources from unproductive to productive producers. The second objective is therefore to better understand the within-firm drivers of productivity growth in transformative times as well as the impact of imperfections at labour and capital markets on the speed of reallocation of production factors. From the background of the declining scope for redistributive policies, the third objective is to assess the combined effects of globalisation and technological change in terms of their distributional impacts. Our fourth objective is to synthesise the results of the micro evidence to inform macroeconomic models in order to assess what policy environment will be supportive to productivity growth.
During the first 12 months of the project, we focussed on i) taking concrete steps towards an improved micro data environment, ii) using new data to shed light on the role of intangible assets and global value chains, iii) assess the role of financial frictions for productivity, and iv) generate first evidence on the distributional impact of trade and automation.

i) We aim at establishing new indicators for productivity measurement and at generating directories of cross-linked microdata, which are homogeneously defined across countries and are made available to researchers for their independent use subject to appropriate confidentiality criteria. We hosted workshops with selected National Statistical institutes to learn about general data availability, associated metadata and the technical and legal infrastructure that will define the use of the data within the project. We specified the statistics and variables required for improved productivity measurement and discussed potential avenues to arrive at a cross-country harmonised database accessible for the scientific public.

ii) Based on new combinations of micro data, our research on intangible capital established a positive relationship between firm intangibles and productivity. Implications drawn from these studies suggest that further development of R&D, innovation and ICT survey data collection could deepen our understanding about the role of intangible inputs in production. We further looked at the links between globalisation and productivity, considering the role of knowledge flows, intangible assets and institutions, as well as the conditions of successful integration into global value chains (GVCs). Results obtained so far suggest that import competition affects productivity through multiple channels. It increases technical efficiency and makes multi-product firms to concentrate more on their core product. The effects are also heterogeneous by the source country: empirical evidence suggests that in countries having comparative advantage in capital-intensive goods, only import competition from high-income countries gives an incentive for firms to increase their productivity. Empirical evidence shows that higher institutional quality makes GVCs more likely to emerge. Intangibles and intellectual property right protection also play an important role in the organisational choices of GVCs.

iii) We analysed the productivity consequences of reallocation at the capital market as well as of financial frictions. We document that unconventional monetary policy in the form of European Central Bank’s security markets program led small and medium sized German firms to substitute labour with capital and to increase labour productivity. Another result is that when regulators are tough on troubled banks in a banking crisis this yields job loss and firm closure during the crisis but favourable economic outcomes in the non-financial sector after the crisis. One implication is that long-term productivity considerations are important in the design of optimal bank resolution mechanisms.

iv) Zooming into distributional consequences of economic shocks, we show that the effects that trade shocks have on labour market outcomes (and from there on inequalities at large) seems to be mediated by technology shocks. The latter appear to have significant consequences on societies: firm-level technological change raises the skill ratio and also the skill premium, leading to higher inequalities in the labour market; at the same time, technological change in the form of higher robot adoption is found to increase support for nationalist and radical-right parties across European regions. We further document the extent to which worker codetermination impacts inequality across firms in terms of wages, productivity, and profits.
Generating a cross-country harmonised database accessible for the scientific public will be a big step toward improving on the state of the art and will open up a multitude of new avenues for research and policy advice. By using new combinations of micro data to arrive at superior productivity measurement techniques we hope to improve the standards for productivity estimation. MICROPROD’s output already consists of several academic papers each containing new scientific contributions, including new evidence as well as methodological innovations, thereby shifting the knowledge frontier. Over the entire project duration, we expect to arrive at a large number of micro-based academic papers on productivity and redistribution. MICROPROD’s overall approach is to use our newly created micro-evidence as building blocks for macroeconomic evidence that will yield suggestions on how to support an EU policy environment being conducive to productivity growth while taking into account distributional implications. Deriving macroeconomic policy implications from a multi-facetted large-scale microeconomic project in a systematic and coordinated way goes beyond the state of the art and can deliver highly credible insights.