Sweden and Spain: two contrasting growth experiences Matilde Mas University of Valencia and Ivie Productivity Conference at Saltsjöbaden Stockholm October 5-6, 2011 [1] Sweden and Spain: two contrasting growth experiences Objectives of the paper: • Contrast the growth experiences of the two countries along the period 1970-2009. • Questions: • Why is Sweden per capita income higher? • Which are the sources of growth in the two countries? • What are the characteristics of the industrial specialization? Index: [2] OVERVIEW GROWTH EXPERIENCES INDUSTRY SPECIALIZATION CONCLUSIONES OVERVIEW [3] Overview Spain and Sweden per capita income gap: how has it evolved? A useful decomposition: G VA P G VA H H L LF L LF P GVA/P: Per capita income GVA/H: Labour Productivity H/L: number of hour worked per employed person L/LF: employment rate LF/P: activity rate (in terms of total population) GVA: Gross Value Added P: total Population H: Total hours worked L: total employment (persons) LF: Labour Force [4] Overview c) Hours worked per employed person (H/L). d) Employment rate (L/LF). Hours Percentages 100 1950 1900 95 1850 1800 GVA per capita and its components Figure 1 . GVA per capita and its components 90 1750 a) GVA per capita. b) Labour productivity. 1995 euros PPP per inhabitant 1995 euros PPP per hour 1700 85 1650 40 40 1600 35 35 1550 30 30 1500 80 75 1970 25 25 20 20 15 15 10 10 5 5 1975 1980 1985 1990 1995 2000 2005 2009 1970 1975 1980 e) Activity rate (LF/P). Percentages 60 0 55 0 1970 1975 1980 1985 1990 1995 2000 2005 2009 1970 1975 1980 1985 1990 1995 2000 2005 2009 50 c) Hours worked per employed person (H/L). d) Employment rate (L/LF). Hours Percentages 45 40 100 1950 1900 35 95 1850 30 1800 90 1970 1750 1700 85 1975 1980 S weden 1985 1990 S pain 1650 1600 80 Source : AMECO (2011), T CB (2011), EU KLEMS (2009) and own calculations 1550 75 1500 1970 1975 1980 1985 1990 1995 2000 e) Activity rate (LF/P). 2005 2009 1970 1975 1980 1985 Source: AMECO (2011),Percentages TCB (2011), EU KLEMS (2009) and own calculations. 60 55 50 45 [5] 40 1990 1995 2000 2005 2009 1995 2000 2005 2009 EU-15 1985 1990 1995 2000 Overview • Sweden’s per capita income has always been higher than the EU average with this difference increasing in the last years of expansion. • On the contrary, per capita income was lower in Spain and this difference has maintained along the period. • The gap between Sweden and Spain originated in Sweden’s higher labor productivity, as well as its higher rate of employment and rate of activity. • Spain only overtakes Sweden in the number of hours worked. • Thus, Spanish workers work more hours, are less productive and support a higher percentage of dependent population. [6] Overview Real GVA per capita decomposition. Sweden minus Spain (GVA per capita differences = 100) 1980 1995 2000 2005 2009 46,20 30,38 64,88 85,82 63,76 -43,53 -15,01 -14,72 -10,10 -8,20 Employment rate 22,56 32,64 17,50 3,90 28,20 Activity rate 74,77 52,00 32,34 20,37 16,24 100,00 100,00 100,00 100,00 100,00 Labour productivity Hours worked by employed person GVA per capita Source: AMECO (2011), TCB (2011), EU KLEMS (2009) and own calculations. • Labour productivity has been one of the main determinants of per capita income differences. • The other key factor is the activity rate. • The Spanish unemployment rate had a negative effect on its relative per capita income during the whole period. • Thus, Spain has a serious problem in almost all relevant variables that affect per capita GDP. [7] Overview Table 2. Real GVA, employment (hours worked) and labour productivity. Total economy Real GVA, employment (hours worked) and labour productivity. Total economy (Annual rates of growth in %) (Annual rates of growth in %) 1970-2009 1970-1995 1995-2009 1995-2007 2007-2009 Sweden Spain Sweden Spain Sweden Spain Sweden Spain Sweden Spain Real GVA 2.02 2.86 1.97 2.89 2.11 2.81 2.97 3.52 -3.05 -1.47 Employment (hours worked) 0.31 1.71 0.76 2.10 0.27 1.70 0.00 2.89 0.38 1.73 2.11 0.70 0.62 2.35 2.98 0.54 -1.06 -1.98 -3.14 1.67 Labour productivity Source: (2011), EU KLEMS (2009) and own calculations Source:TCB TCB (2011), EU KLEMS (2009) and own calculations. • During 1970-2009, Spain showed a more dynamic behaviour. • Both countries faced difficulties in creating jobs between 1970-1995. • In 1995-2007, Spain experienced a productivity slowdown while in Sweden productivity accelerated. • Thus, Spain enjoyed its highest rate of labour productivity growth in 19701995 and in 2007-2009, precisely when it was unable to create employment. • For Sweden, the golden years of productivity growth were 1995-2007. • During the first two years of crisis while Sweden opted for labour hoarding, Spain took the alternative path of strong labour destruction mainly -though not exclusively- in the over dimensioned construction industry. [8] TWO CONTRASTING GROWTH EXPERIENCES [9] 4 Figure 2. Value2 adde d, hours worke d and labour productivity growth. 1970-1995 and 1995-2007 0 Two contrasting growth experiences (Percentages) -2 Gross value added. 1970-1995 and 1995-2007 a) Gross value -6added (percentages) -8 -4 18 TOT ELECOM MaxElec OtherG DISTR FINBU PERS NONMAR Agriculture Construction c) Labour productivity 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 0 2 -2 0 TOT TOT ELECOM b) Hours worked 10 ELECOM MaxElec MaxElec OtherG OtherG DISTR DISTR 1995-2007 Sweden FINBU FINBU PERS NONMAR PERS Agriculture Construction NONMAR Agriculture Construction 1970-1995 Spain Sweden Spain Note: 8 TOT=Total industries; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate; PERS=Personal services; and NONMAR=Non-market services. 6 T OTand =T otown al industries; ELECOM=Elect rical machinery, post and communication services; MaxElec=T otal Source: EU KLEMSNote: (2009) calculations. 4 manufacturing, excluding electrical; OtherG=Ot her product ion; DIST =Distribut ion; FINBU=Finance and business, except real est ate; P ERS=P ersonal services; and NONMAR=Non-market services. Source: EU KLEMS (2009) and own caculat ions. • Spain outperformed Sweden in terms of GVA growth at the aggregated level 2 but 0 with important differences among industries. -2 • Sweden showed a much more dynamic behaviour in the ICT production -4 sectors (ELECOM). [ 10 -6] 2 6 0 4 Two contrasting growth experiences -2 2 -4 0 -6 TOT worked. ELECOM1970-1995 MaxElec DISTR Hours andOtherG 1995-2007 -8 (percentages) b) Hours worked TOT ELECOM MaxElec FINBU OtherG DISTR PERS FINBU PERS NONMAR NONMAR Agriculture Agriculture Construction Construction c) Labour productivity 10 16 8 14 6 12 4 10 2 8 0 6 4 -2 2 -4 0 -6 -2 TOT -8 TOT ELECOM ELECOM MaxElec MaxElec OtherG OtherG DISTR DISTR FINBU FINBU PERS PERS 1995-2007 c) Labour productivity Sweden 16 NONMAR Agriculture NONMAR Construction Agriculture Construction 1970-1995 Sweden Spain Spain Note: TOT=Total industries; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate; PERS=Personal services; and NONMAR=Non-market services. 12 Source: EU KLEMSNote: (2009) and own calculations. T OT =T ot al industries; ELECOM=Elect rical machinery, post and communication services; MaxElec=T otal 14 10 manufacturing, excluding electrical; OtherG=Ot her product ion; DIST =Distribut ion; FINBU=Finance and business, except real est ate; P ERS=P ersonal services; and NONMAR=Non-market services. Source: EU KLEMS (2009) and own caculat ions. • The ability of the Spanish economy to create new jobs was astonishing after 8 25 years of almost null labour creation (its destruction since the beginning of 6 the current crisis is also astonishing). 4 2 • While Sweden destroyed employment in ELECOM, Spain increased it. 0 • -2The most noticeable difference is the employment rate of growth in the construction industry. TOT [ 11 ] ELECOM MaxElec OtherG DISTR FINBU PERS NONMAR Agriculture Construction -2 2 -4 0 Two contrasting growth experiences -6 -2 -8 -4 -6 Labour productivity. 1970-1995 and 1995-2007 -8 c) Labour productivity (percentages) TOT ELECOM MaxElec TOT 16 OtherG ELECOM MaxElec DISTR OtherG DISTR FINBU FINBU PERS PERS NONMAR NONMAR Agriculture Agriculture Construction Construction c) Labour productivity 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 TOT -2 TOT ELECOM ELECOM MaxElec MaxElec OtherG OtherG DISTR DISTR 1995-2007 1995-2007 Sweden FINBU FINBU PERS PERS NONMAR Agriculture NONMAR Construction Agriculture Construction 1970-1995 Spain Sweden 1970-1995 Spain Note: TOT=Total industries; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; Sweden OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate; PERS=Personal services;Spain and NONMAR=Non-market services. Sweden Spain Source: EU KLEMS (2009) and own calculations. Note: T OT =T ot al industries; ELECOM=Elect rical machinery, post and communication services; MaxElec=T otal manufacturing, excluding electrical; OtherG=Ot her product ion; DIST =Distribut ion; FINBU=Finance and business, except real est ate; P ERS=P ersonal services; and NONMAR=Non-market services. Source: EU KLEMS (2009) and own caculat ions. • Whereas in Spain labour productivity growth decelerated in the expansion Not e: T OT =T ot al indust ELECOM=Electit rical machinery, post and communicat ion services; MaxElec=T ot al years, inries;Sweden accelerated. manufact uring, excluding elect rical; Ot herG=Ot her product ion; DIST =Dist ribut ion; FINBU=Finance and business, except real est at e; P ERS=P ersonal services; and NONMAR=Non-market services. • In all industry aggregations labour productivity growth was higher in Sweden Source: EU KLEMS (2009) and own caculat ions. than in Spain. • The most significant differences were found in ELECOM, Agriculture, MaxElec and Distribution. [ 12 ] Two contrasting growth experiences Contributions to labour productivity growth. 1995-2007 (percentages) a) Sweden MARKT ELECOM MaxElec OtherG DISTR FINBU PERS Agriculture Construction 1. Labour productivity growth (=2+3+6) 3,31 14,24 3,84 0,82 3,12 1,48 0,79 4,87 -0,18 2. Labour composition change 0,26 0,53 0,29 0,15 0,23 0,31 0,05 0,24 0,16 3. Capital contribution (=4+5) 1,53 1,99 1,90 0,93 1,63 1,40 0,45 0,84 0,30 4. ICT capital per hour 0,57 0,67 0,48 0,08 0,60 0,80 0,22 0,04 0,04 5. Non-ICT capital per hour 0,96 1,32 1,42 0,85 1,03 0,60 0,23 0,80 0,26 1,52 11,72 1,65 -0,26 1,26 -0,24 0,29 3,78 -0,64 MaxElec OtherG DISTR FINBU 6. MFP b) Spain MARKT ELECOM PERS Agriculture Construction 1. Labour productivity growth (=2+3+6) 0,63 3,07 0,83 0,28 0,85 1,51 -0,88 2,42 -1,81 2. Labour composition change 0,38 0,55 0,45 0,27 0,41 0,43 0,28 0,28 0,31 3. Capital contribution (=4+5) 0,86 3,08 0,71 0,11 1,42 0,52 1,16 1,12 0,06 4. ICT capital per hour 0,38 1,42 0,27 0,10 0,50 0,57 0,25 0,01 0,12 5. Non-ICT capital per hour 6. MFP 0,48 1,66 0,44 0,01 0,92 -0,05 0,92 1,11 -0,06 -0,61 -0,56 -0,33 -0,10 -0,98 0,55 -2,33 1,02 -2,18 Note: MARKT=Market economy; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate and PERS=Personal services. Source: EU KLEMS (2009) and own calculations. [ 13 ] Two contrasting growth experiences • In 1995-2007 labour productivity growth was very high in Sweden (3.3%) and very low in Spain (0.63%). • TFP contributions were the most divergent drivers of growth. • In Spain, the highest contribution came from non-ICT capital deepening while in Sweden was TFP. • ICT capital deepening also made a positive contribution in both countries but with less intensity in Spain than in Sweden. • Followed closely by the contribution of labour composition changes, especially in the Spanish case. [ 14 ] INDUSTRY SPECIALIZATION [ 15 ] INDUSTRY SPECIALIZATION Four questions: 1. In which country is production more diversified? 2. In which country is the sectoral composition of output more different from the EU-15 average? 3. Are the differences in productivity growth due to a redistribution of factors towards industries with higher productivity levels or/and higher productivity growth (structural change effect) or is it a consequence of an overall pattern of productivity growth at industrial level (within-industry effect)? 4. Are the differences between pairs of countries due to a country effect (the differences occurred even without any difference in the industrial specialization) or to a total specialization effect (which captures the impact of the different specialization)? [ 16 ] INDUSTRY SPECIALIZATION GVA sectoral dispersion Figure 3. GVA s e ctoral dis pe rs ion (Coefficientofofvariation variationof ofGVA GVA sectoral sectoral share (coefficient shareinintotal) total) 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 1970 1975 1980 Sweden 1985 1990 Sp ain 1995 2000 2007 EU-15 Source: KLEMS (2009) and own SourceEU : EU KLEMS (2009) andcalculations. own calculat ions • The dispersion of output among the different industries used to be less pronounced in Spain than in Sweden and the EU-15 aggregate. • However, by the end of the period the three converged. [ 17 ] INDUSTRY SPECIALIZATION 2. In which country is the sectoral composition of output more different from the EU-15 average? SPAIN Figure 4. Inde x of diffe re nce s in se ctoral compos ition Index of differences in sectoral composition (GVA percentages) (GVA percentages) N 1 L X X * 1 0 0 A B j A j B 2 j 1 30 25 20 15 10 5 1970 1975 1980 Sweden/EU-15 Source: EU KLEMS (2009) and own calculations. Source : EU KLEMS (2009) and own calculat ions [ 18 ] 1985 1990 Spain/EU-15 1995 2000 Sweden/Spain 2007 INDUSTRY SPECIALIZATION Four questions: 1. In which country is production more diversified? 2. In which country is the sectoral composition of output more different from the EU-15? 3. Are the differences in productivity growth due to a redistribution of factors towards industries with higher productivity levels or/and higher productivity growth (structural change effect) or is it a consequence of an overall pattern of productivity growth at industrial level (within-industry effect)? 4. Are the differences between pairs of countries due to a country effect (the differences occurred even without any difference in the industrial specialization) or to a total specialization effect (which captures the impact of the different specialization)? [ 19 ] INDUSTRY SPECIALIZATION YT LT Y Y J 0 L0 j 0 jT L jT j 1 Y j0 Lj0 J jT j 0 j 1 Y J j0 Lj0 jT j 1 S t a t ic effect W it h in -in d u st r y effect Y jT Y j0 j0 L Lj0 jT D y n a m ic effect S t r u ct u r a l ch a n ge effect Table 5. Decomposition of productivitygrowth. growth. Shift-share analysis Decomposition of productivity Shift-share analysis (Annual average growth rates, in %) (annual average growth rates, in %) a) Sweden 1970-1995 1995-2007 Total effect 1.70 2.35 Within-industry effect 1.44 2.76 Structural change effect 0.26 -0.41 1970-1995 1995-2007 Total effect 2.89 0.54 Within-industry effect 2.35 0.62 Structural change effect 0.54 -0.07 1970-1995 1995-2007 Total effect 2.63 1.42 Within-industry effect 2.20 1.51 Structural change effect 0.43 -0.09 b) Spain c) EU-15 Source: EU KLEMS (2009) and own calculations Source: EU KLEMS (2009) and own calculations. [ 20 ] • The main source of productivity growth is always the “within-industry effect”. That is, the one obtained because of the internal productivity improvements in each industry INDUSTRY SPECIALIZATION Four questions: 1. In which country is production more diversified? 2. In which country is the sectoral composition of output more different from the EU-15? 3. Are the differences in productivity growth due to a redistribution of factors towards industries with higher productivity levels or/and higher productivity growth (structural change effect) or is it a consequence of an overall pattern of productivity growth at industrial level (within-industry effect)? 4. Are the differences between pairs of countries due to a country effect (the differences occurred even without any difference in the industrial specialization) or to a total specialization effect (which captures the impact of the different specialization)? [ 21 ] INDUSTRY SPECIALIZATION YA LA YB Y jA Y jB jB L L j 1 jB jA J LB J jA jB j 1 Y J jB L jB j 1 jA Y jA Y jB jB L L jB jA S p ecia liza t ion effect C ou n t r y effect A lloca t ion effect T ot a l S p ecia liza t ion effe ct Shift-share analysis growth. Shift-share of productivity 6. Decomposition Table Decomposition of productivity growth. analysis (Percentages) (percentages) a) Sweden vs. EU-15 1970 1995 2007 Total effect 31.37 4.01 16.27 Country effect 19.20 -2.49 11.91 Total specialization effect 12.17 6.50 4.36 1970 1995 2007 -12.69 -6.93 -16.23 14.86 3.42 -11.12 -27.55 -10.36 -5.11 1970 1995 2007 -33.54 -10.52 -27.96 11.93 18.59 -19.12 -45.47 -29.11 -8.84 b) Spain vs. EU-15 Total effect Country effect Total specialization effect c) Spain vs. Sweden Total effect Country effect Total specialization effect Source: EU KLEMS (2009) and own calculations Source: EU KLEMS (2009) and own calculations. [ 22 ] • Sweden’s productivity has been always higher than Spain and EU-15 average, while Spain’s has been lower. • The impact of the country effect and the specialization effect has been changing along the period. FINAL REMARKS • The overall picture is that Spain lags behind Sweden in almost all variables. • Spain´s per capita income is lower than Sweden as a consequence of its lower productivity growth, in adition to its lower employment and activity rates. Spain only outperforms Sweden in the number of hours worked by employed person. • Concerning productivity, the problem of the Spanish economy is not, or is not only, the result of its specialization in sectors with low productivity gains but it is a more general problem that affects all industries. • This, together with the negative MFP contributions, indicates a problem in the fuctioning of the Spanish economy. • Its comparison with Sweden highlights the distance between the two countries and the importance of the problems faced. • But it also indicates that a better functioning of the Spanish economy is feasible. [ 23 ]