Europaudvalget 2015
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EUROPEAN
COMMISSION
Brussels, 28.10.2015
SWD(2015) 203 final
PART 2/3
COMMISSION STAFF WORKING DOCUMENT
Report on Single Market Integration and Competitiveness in the EU and its Member
States
Accompanying the document
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS
Upgrading the Single Market: More Opportunities for People and Business
{COM(2015) 550 final}
{SWD(2015) 202 final}
EN
EN
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2.2
Overall evolution of productivity
This limited capacity of generating mid-paid jobs will
be of key importance for the digitisation of industry.
Available estimates for the US conclude that in less
than two decades up to 47 % of total employment will
be at risk of disappearance due to computerisation,
69
with the risk increasing the lower the wage or the
educational attainment. This means that there is a
need to find other tasks and sectors capable of
absorbing these employment losses, probably in areas
which demand creativity and social intelligence. It is
therefore necessary to eliminate obstacles to the
reallocation of resources both within Member States
and in the Single Market.
In this respect, it is important to consider not only the
impact of the composition of the economic structure,
but also the impact of regional specialisation on
wages. Data from the European Cluster Observatory
analysed in a recent study
70
not only illustrates the
(
69
)
(
70
)
Frey, CB.; Osborne, M.A. (2013),
The future of employment:
how susceptible are Jobs to computerisation?,
OMS
Working Paper.
ECORYS et al. (2015),
An empirical assessment of the
contribution of clusters to smart specialisation,
report for
the European Commission, DG GROW.
substantial variety in wages between sectors (at a
more detailed level), but also that wages depend on
the extent to which the employment is regionally
concentrated and specialised in clusters. The wage
gap between clusters and non-clusters shows that,
overall, average wages are higher in clusters (EUR
25,672 compared to EUR 24,870 outside clusters),
pointing to somewhat higher productivity levels. The
wage differences can be particularly large in high-
tech and medium-tech manufacturing industries such
as chemicals, aerospace, biopharmaceuticals,
communications equipment and medical devices.
Also in high-wage services sectors, such as financial
and business services and insurance services, the
wage difference is substantial.
71
(
71
)
Clusters can be broadly defined as a group of firms, related
economic actors, and institutions that are located near each
other and have reached a sufficient scale to develop
specialised expertise, services, resources, suppliers and
skills. See European Commission,
The concept of clusters
and cluster policies and their role for competitiveness and
innovation: Main statistical results and lessons learned,
SEC (2008) 2637.
2.2
Overall evolution of productivity
Reducing the distortions hampering a more efficient
allocation of resources towards most productive firms
could lift productivity. There are indications that the
productivity slowdown has been largely due to
policy-induced misallocations within sectors.
73
The
payoffs of structural reforms tackling these hurdles
are potentially large. Yet there is no “one size fits all”
solution and reforms should take into account the
varying structural conditions of sectors and Member
States.
It is essential to boost productivity to make the
recovery sustainable and avoid the risk of falling back
to weak growth rates. A recovery based on factor
accumulation may lead to an undesirable
misallocation of production factors. The negative
effects of such scenario became apparent in the case
of Spain, where a period of economic expansion with
negative total factor productivity (TFP) growth led to
the deterioration of competitiveness and the
emergence of significant imbalances.
72
Promoting
productivity growth is therefore crucial to improving
competitiveness in Europe.
(
73
)
(
72
)
Garcia-Santana, M., Moral-Benito, E., Pijoan-Mas, J.,
Ramos, R.:
Growing like Spain: 1995-2007,
May 2015.
Cf. Dabla-Norris, E., Guo, S., Haksar, V., Kim, M.,
Kochhar, K., Wiseman, K., and Zdzienicka, A.,
The new
normal: a sector-level perspective on productivity trends in
advanced economies,
Staff discussion note SDN/15/03,
March 2015, International Monetary Fund.
27
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2.2
Overall evolution of productivity
2.2.1
Labour productivity in industry
Labour productivity
74
indicates how efficiently the
production inputs related to workforce are combined
to produce goods and services, offering a measure of
economic growth, competitiveness and living
standards.
Figure 2.11 depicts labour productivity in
manufacturing on the horizontal axis, while the
vertical axis shows growth from 2008 to 2013.
75
Denmark is the only country reporting both above-
average productivity and sustained growth in the
period 2008-2013. Countries in the upper left quarter
(
74
)
In this section labour productivity is measured by means of
value added per person employed in manufacturing and is
evaluated by taking into account variations in manufacturing
workforce and profitability.
The choice of the 2008-2013 period has been tested for
robustness over a ten year period and provides a proxy of the
labour productivity trends in the Member States. Figures for
Ireland (EUR 132 030 in 2013) are the highest in the EU;
however, as this result reflects the behaviour of a large
number of foreign multinationals and contains effects of
transfer pricing, it has been considered an outlier and
excluded from Figure 2.11.
(
75
)
show a convergence trend. Their productivity levels
are still below average but have been growing
consistently, reducing their gap with the best
performers. A number of countries in this group are
catching up rapidly (Estonia, Hungary, Lithuania,
Latvia, Poland, and Romania). The other Member
States in this group (Czech Republic, Portugal,
Slovakia, Slovenia and Croatia) have also improved
their performance with respect to the average;
however, considering their initial level and the
performance of other countries, there seems to be
considerable scope for accelerating the convergence
path in many of these countries. Most countries
laying on the right hand side part of the figure report
consistent and stable performance (Austria, Belgium,
France, Germany, the Netherlands, and Sweden) but
some of them have seen a reduction of their relative
competitiveness (Finland and United Kingdom).
Finally, countries in the lower left quarter have
experienced a deterioration of their relative
productivity (Cyprus, Greece, Italy, Luxembourg, and
Malta).
Figure 2.11:
180%
Performance and change in manufacturing productivity (2008-2013)
Change in LPppe in manufacturing (2008-13)
160%
140%
120%
PL
LV
EE
PT
RO
HU
SK
CZ
100%
80%
CY
MT
SI
LT
DK
HR
EU28
EL
IT
UK
FI
FR
SE
AT
NL
BE
DE
LU
60%
20
30
40
50
60
70
80
90
Labour poductivity per person employed in manufacturing (2013)
Note:
Horizontal axis = value added per person employed in manufacturing (thousand EUR); Vertical axis = difference in percentage
with respect to EU compound annual growth rate (2008-2013). Data for Ireland have been excluded from this chart. Data for
Bulgaria and Spain were not available. Romania: last available data 2012.
Source:
Eurostat
Figure 2.12 shows the evolution of labour
productivity at sector level.
76
The growth rates are
calculated as averages for the period 2003-2013. We
show results for both the EU-28 and the euro area (18
countries). For manufacturing, there has been a
moderate improvement for the EU-28 as a whole. But
there are significant differences across sectors. The
largest improvements for the EU-28 are observable in
(
76
)
Calculated as production per hour worked using more
recently updated data from Eurostat Structural Business
Statistics.
28
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2.2
Overall evolution of productivity
other transport equipment, as well as in computer,
electronic and optical products. Note that both sectors
are characterised by high technological intensity, but
had a below the EU average productivity level until
2012. On the contrary, the lowest improvements are
observable for low-tech industries producing tobacco,
leather and wearing apparel.
But the pattern is different for the euro area. When
considering this aggregate, the largest labour
productivity gain was achieved in the manufacture of
computers, electronic and optical products, followed
by pharmaceutical products. This could be a
reflection of the different specialisations of countries,
as well as the outcome of delocalisation of plants in
Eastern Europe (in particular for transport
equipment).
Figure 2.12:
Labour productivity growth in EU manufacturing, 2003-2013
EA-18
MANUFACTURING
Computer, electronic and optical products
Other transport equipment
EU-28
Chemicals and chemical products
Basic pharmaceutical products and pharmaceutical…
Repair and installation
Paper and paper products
Other manufacturing
Beverages
Machinery and equipment n.e.c.
Motor vehicles, trailers and semi-trailers
Basic metals
Textiles
Printing and reproduction
Food products
Electrical equipment
Furniture
Wood and wood products
Coke and refined petroleum products
Other non-metallic mineral products
Rubber and plastic products
Wearing apparel
Fabricated metal products
Tobacco products
Leather and related products
-3
Note:
-2
-1
0
1
2
3
4
5
Labour productivity average annual growth rate, volume index of production per hours worked
Source:
European Commission,
EU Structural Change 2015,
DG GROW.
29
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2.2
Overall evolution of productivity
2.2.2
Labour productivity in services
As shown in Figure 2.13 below, in 2013, labour
productivity per person employed in services was the
highest in Luxembourg, which may reflect the fact
that it also has the highest GDP per capita in the EU,
at 2.6 times the EU-28 average, and the important
weight of its financial services sector. Productivity is
closely related to wages. After Luxembourg there is a
cluster of EU-15 Member States (Belgium, Italy,
France), who have higher productivity and relatively
high wages. At the other extreme, productivity in
Bulgaria is the lowest as the GDP per capita in
Bulgaria is less than half the EU average. Just ahead
of Bulgaria we find a host of new Member States
(Estonia, Romania, Hungary, Latvia and Lithuania),
again reflecting lower GDP per capita feeding into
their productivity results.
In the period between 2008 and 2013, there was a
positive change in labour productivity per person
employed in many Member States. This was
particularly pronounced in the Member States which
joined the EU since 2004, including Latvia,
Lithuania, Poland, Bulgaria, and Slovakia. This
development may be the result of the catching up of
these countries relative to EU-15 Member States,
despite the financial crisis. At the opposite end of the
scale, Romania had the greatest negative change in
labour productivity during this time period.
Figure 2.13:
140%
Change in labour poductivity per person employed (2008-2013)
In the retail sector, the productivity gap vis-à-vis the
United States has continued to widen. As indicated in
the Commission Staff Working Document
accompanying the Single Market Strategy,
77
the
difference can be explained by less restrictive entry
regulations, bigger investments in ICT and innovation
and the creation of new retail formats in the US. The
latter in particular forces incumbents to become more
productive and replaces less productive firms with
more productive ones.
There is also a productivity gap between the retail
sector and other sectors of the European economy.
For example, the retail sector's wage-adjusted labour
productivity is significantly lower than the one of
manufacturing (119 % compared to 144 %). When
compared at EU country-level, wage-adjusted labour
productivity is significantly higher than the EU
average in Estonia, Latvia, Luxembourg, Malta,
Romania, Slovenia, Slovakia and the UK and
significantly lower in Bulgaria, Greece, Italy,
Hungary, Portugal and Sweden.
78
(
77
)
(
78
)
Cf. European Commission, (2015),
A Single Market Strategy
for Europe – Analysis and Evidence,
SWD(2015) 202 final.
Eurostat data, 2012
Labour productivity in services
130%
120%
BG
LV
LT
PL
CY
SK
MT
DE
EE
PT
EU28
SI
UK
NL
GR
DK
SE
FI
ES
FR
BE
IT
IE
LU
110%
100%
90%
80%
20
30
40
50
CZ
AT
HU
RO
60
70
80
90
100
110
120
Labour poductivity per person employed in services (2013
)
Source:
Own calculation on the basis of Eurostat data
30
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2.2
Overall evolution of productivity
2.2.3
Components of labour productivity
Figure 2.14:
Within Effect
Figure 2.14 shows the result of a shift share analysis
79
examining the changes in labour productivity.
80
It
shows that in the period 2002-07, labour productivity
increased significantly more than in the period 2008-
13 (8.75 % vs. 3.61 %). This is not surprising given
that the latter period was characterised by the
financial crisis and the subsequent recession.
Interestingly, most of the change can be explained by
a sharp reduction in the contribution of each sector
(within effect) in the second period, which dropped
from 7.92 to 2.93. In the period 2002-2007, the
within effect accounted for 86 % of the total variation
(in absolute value), while only 78 % in 2008-2013.
This dynamic is mainly explained by the drop of
productivity caused by the financial and economic
crisis in sectors such as: industry; trade; transport;
accommodation services; professional scientific,
technical activities; and financial and insurance.
Decomposition of labour
productivity, EU-28
Static Shift
Dynamic Shift
2008-13
Total
2002-07
10
8
6
7,92
4
2,93
1,21
0,78
-0,10
2
0
-0,39
-2
Note:
Shift-Share analysis for 10 sectors classification of
economic activities.
Source:
European Commission, EU Structural Change 2015,
DG GROW.
(
79
)
(
80
)
Figure 2.13 decomposes changes in labour productivity for
the EU-28 into three effects: "within effect", "static shift"
and "dynamic shift". The "within effect" measures the
contribution of each sector to the total change of labour
productivity, The "structural change effect" measures
reallocation of resources across sectors. It can be further
divided into the "static shift" and "dynamic shift". The
"static shift" measures the structural shifts in the economy
by considering the changes in labour shares across sectors
with different levels of productivity, while the "dynamic
shift" measures structural shifts in the economy by
considering the changes in labour shares across sectors with
different productivity growth.
Cf. European Commission (2015),
EU Structural Change
2015,
DG GROW.
At the same time, the productivity growth due to
changes in labour shares across sectors with different
levels of productivity (static shift) remained more
stable in absolute value, slightly decreasing from a
value of 1.21 % in 2002-2007 to 0.78 % in 2008-
2013, but increasing substantially in terms of share
(from 13 % to 21 %). This suggests an ongoing
structural change in the European economy, for
which a larger share of workers is employed in more
productive sectors. Data suggests an outflow of
employment from agriculture, forestry and fishing
and industry to sectors with higher productivity, such
as information and communication, finance and
insurance, and services in general.
31
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2.2
Overall evolution of productivity
Figure 2.15:
Evolution of labour productivity for the EU-28 (2000=100)
(B-E) Industry (except construction)
(F) Construction
(J) Information and communication
(L) Real estate activities
(O-Q) PA, defence, education, health
(A) Agriculture, forestry and fishing
(C) Manufacturing
(G-I) Trade, transport, accommodation & food services
(K) Financial and insurance activities
(M_N) Professional, scientific, admin. & support services
(R-U) Arts, entertainment, recreation; other services
150
130
110
90
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Note:
Gross value added at basic prices (chain-linked volumes, reference year 2000) per person employed for the EU-28 aggregate.
Source:
European Commission, EU Structural Change 2015, DG GROW.
Figure 2.15 shows the evolution of labour
productivity across different sectors. The productivity
growth due to changes in labour shares across sectors
with different productivity growth (dynamic shift) is
negative for both periods considered, but the effect is
small in magnitude. This suggests that a small extra
fraction of workers have been employed by sectors
with declining productivity, in particular professional,
scientific and technical activities (which includes also
administrative and support service activities).
The same analysis can be repeated for individual
Member States. For the period 2002-2007, most of
the top performers in terms of total productivity
changes are CEE Member States (Estonia, Latvia and
Slovakia). But only Latvia managed to keep the same
standard for the following period. For the period
2008-2013, one notable case is Ireland, whose
performance was excellent. While most countries
experienced improvements in labour productivity in
the period 2002-2007, the crisis had negative
consequences in the subsequent time frame,
especially for countries like Greece, Finland and the
United Kingdom.
In general, the within sector improvements explain
most of the changes in labour productivity. This is
probably due to the fact that we consider very large
sectoral aggregations. But there are interesting
exceptions, like Lithuania in the period 2002-2007,
during which the static shift was positive and very
large. This can be explained by a sharp decrease of
the share of employment in the primary sector,
matched by an increase both in industry and in trade,
transport, accommodation and food service activities.
2.2.4
Convergence process
Convergence at sectoral level
There are huge differences in the productivity within
the same sector across Member States (see
introductory chapter). A recent IMF staff research on
productivity trends
81
confirmed that even the most
technologically advanced countries are lagging in
certain sectors and could thus reap large gains from
adopting existing best practices. For instance,
Member States with leading performances in
manufacturing such as Germany and Sweden are
lagging in ICT and personal services respectively.
There are also large differences across subsectors
within the same sector. For instance, in
manufacturing, the Member States analysed
82
are
simultaneously leaders and laggards in different
industries (Figure 2.16). A clear example is the
(
81
)
Cf. Dabla-Norris, E., Guo, S., Haksar, V., Kim, M.,
Kochhar, K., Wiseman, K., and Zdzienicka, A.,
The new
normal: a sector-level perspective on productivity trends in
advanced economies,
Staff discussion note SDN/15/03,
March 2015, International Monetary Fund.
Austria, Germany, Denmark, Spain, United Kingdom, Italy,
the Netherlands, Sweden, and France.
(
82
)
32
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2.2
Overall evolution of productivity
Netherlands, which is leading on: food, beverages,
tobacco; textiles, leather, footwear; chemicals; and
basic, fabricated metals. Yet it is largely lagging on
wood and cork; transport equipment, and recycling.
Figure 2.16:
Overall, there appears to be a larger margin for
improvement in the following industries: rubber and
plastics, transport equipment; and recycling.
Total Factor Productivity level in manufacturing (2000-2007 average, weighted by VA-
share; normalized: leader in sector = 100)
Transport equipment
Basic / Fabricated
metal
Electrical / Optical
equipment
Rubber / Plastics
Chemicals
Pulp / Paper /
Printing / Publishing
Wood / Of wood and
cork
Textiles / Leather /
Footwear
Food / Beverages /
Tobacco
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
80,0
90,0
100,0
Source:
IMF (special thanks to Vikram Haksar and his colleagues for this information)
In the services sector, we encounter a similar situation
(Figure 2.17). Only the Netherlands appears among
the leaders in all subsectors analysed. Yet, even in
this case, there are areas with margin for
improvement such as renting of machinery and
Figure 2.17:
equipment, and other business activities. Overall, the
analysed Member States outperform in finance and
business services, but underperform in distribution
services, particularly on transport and storage.
Total Factor Productivity level in services (2000-2007 average, weighted by VA-share;
normalized: leader in sector=100)
USA
DE
IT
SE
AT
FR
DK
ES
Financial intermediation
NL
AUS
USA
Renting of M&Eq / Oth. business
activities
Transport / Storage
Wholesale / Retail trade
Electricity / Gas / Water supply
Real estates activities
Post / Telecommunications
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Source:
IMF (special thanks to Vikram Haksar and his colleagues for this information)
33
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2.2
Overall evolution of productivity
It should be noted that the ICT sector appears to offer
the larger margin of improvement. Only Sweden is
leading in this sector, with all other Member States
showing a laggard performance.
To a certain extent, these productivity gaps can be
anticipated due to factors such as sectoral R&D
intensity or agglomeration spillovers (e.g.
manufacturing in Germany). However, the above
mentioned analysis suggests that policy distortions
are playing a significant role. For instance, regulatory
or tax exemptions, subsidies, size-dependent policies,
labour and product market rigidities, may all lead
firms to make inefficient choices and investment
decisions. These policy distortions generate massive
losses due to lost productivity gains. If they are
tackled, productivity and thus economic growth
would be boosted. The wide variation in the
regulation of each sector across Member States seems
to confirm this result. Fostering Single Market
integration would decrease regulatory dispersion and
contribute to reduce productivity gaps.
The productivity losses generated by policy
distortions in the service sector are among the
biggest. Indeed, the heaviest drags on productivity
growth have come from service sectors which are
often closed to competition, such as non-market,
personal and business services.
83
The liberalisation of
(
83
)
The economic analysis underpinning the Single Market
Strategy confirms that reducing the main restrictions in the
business services sector would significantly enhance the
efficient allocation of resources within this subsector. Cf.
regulated services sectors could thus be an important
source of job creation and output growth.
Convergence at national and regional level
The productivity growth of an economy depends on
the productivity of each sector but also on whether
the resources are allocated to those sectors with
higher productivity growth. However, policy
measures can alter that process and lead to the
allocation of resources to less productive sectors, thus
hampering economic growth. The analysis referred to
above suggests that the payoffs from improving
factor allocation across sectors are potentially large.
Productivity gains from a better allocation within
countries could already reach more than 10 % in
some cases, boosting economic growth.
There is a wide dispersion between and within
Member States as regards regional labour
productivity growth from 2008 to 2012 (Figure 2.18).
Within Member States, the range from lowest to
highest labour productivity change was particularly
wide in Greece, Poland and Romania, indicating
growing internal competitiveness differentials and
divergence.
European Commission, (2015),
A Single Market Strategy for
Europe – Analysis and Evidence,
SWD(2015) 202 final.
34
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2.2
Overall evolution of productivity
Figure 2.18:
Regional distribution of labour productivity changes (2008-2012)
Source:
PWC, (2015), Exploring the potential role of human, physical and knowledge capital investments in a smart specialisation
context, a study for the European Commission, DG GROW
While in most countries there were regions with
increasing as well as regions with decreasing labour
productivity from 2008 to 2012, in some Member
States there was positive or negative labour
productivity growth in all regions: Bulgaria, Ireland,
Slovakia and Sweden (positive growth in all regions);
Hungary, Italy and Slovenia (negative growth in all
regions). Whilst this may generate convergence at the
national level, it adds to the divergence between
Member States.
Labour productivity growth took place mainly in
regions of Bulgaria, Spain, Portugal, Ireland, Sweden,
Poland, Slovakia and the Baltic States. In the central
European Member States as well as in Finland, the
UK, Greece and Cyprus, most regions experienced
falling labour productivity. In many cases, this was
due to output cuts greater than labour cuts. In other
cases, output grew but not as much as the number of
persons employed.
The process of convergence of productivity at
regional level seems to have stalled given the wide
dispersion in growth rates (Figure 2.18). Indeed
divergence has been a stronger force than
convergence in the last few years. Resuming the
convergence process could produce huge economic
gains. A recent study
84
suggests there are three main
ways to improve the competitiveness of
underperforming regions without hampering that of
the best performing: internal and external R&D
collaboration; investment in human capital,
knowledge, R&D and innovation; and regional
absorptive capacity. These areas could therefore be
the focus of any regional cluster policies and smart
specialisation strategies that need to also consider the
strength and bottlenecks of their specific regional
economic structure.
Convergence across firms
Recent OECD research
85
shows that there is a rising
gap in productivity growth between different types of
(
84
)
PwC, (2015),
Exploring the potential role of human,
physical and knowledge capital investments in a smart
specialisation context,
study for the European Commission,
DG GROW.
McGowan, M.A., Andrews, D., Criscuolo, C., Nicoletti, G.,
(2015),
The future of productivity,
OECD report, July 2015.
(
85
)
35
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2.2
Overall evolution of productivity
firms. Productivity growth of the globally most
productive firms has remained strong, while that of
the rest of firms has slowed. This performance is
stronger in the services sector than in manufacturing.
Effective measures facilitating the diffusion and
adoption of technologies across firms could therefore
boost productivity.
The above mentioned research also finds that even if
the most advanced national firms have high levels of
productivity, they may fail to significantly impact
aggregate productivity due to their relative small size.
A more efficient allocation of resources towards most
productive firms would help them grow and thus
boost productivity growth.
crisis. The crisis hit overall EU TFP severely. The EU
lost more than the US by 2009, and the US recovered
much faster their pre-crisis levels and continued to
grow. Japan – where the damage was similar to that
of the EU – also managed to recover faster and to
follow a recovery path similar to that of the US.
Figure 2.19:
Evolution of Total Factor
Productivity (2005-2014)
European Union (28 countries)
United States
Euro area (18 countries)
Japan
108
106
104
102
2.2.5
Comparison with global
competitors: TFP and
benchmarking with US
100
98
96
Total factor productivity (TFP) captures changes in
productivity which are not accounted for by the
changes in the quantities of capital and labour inputs,
but rather by the way they are combined, i.e. the
degree of their utilisation and the technology or
organisation employed in the production.
86
Figure
2.19 shows the evolution of TFP from 2005 to 2014
for the EU-28 against that of some major competitors.
During the crisis and in its immediate aftermath, TFP
decreased everywhere, reaching its lowest level in
2009. This may be the effect of short run excess
capacity due to the drop of demand following the
(
86
)
The European Commission produces estimates of TFP based
on the production function methodology approved by the
ECOFIN Council (see European Commission (2014)). It
accounts for the fact that first due to cyclical shifts of
demand or other market frictions, the economy may not
utilise its capacity fully; and second inputs can be combined
in different ways, depending on the technologies available
and the efficiency of the organization. These corrections are
measured by total factor productivity, which should be
interpreted as an indicator of both the degree of utilisation of
inputs as well as the efficiency of their combination.
94
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Note:
Index 2005=100
Source:
European Commission, EU Structural Change 2015,
DG GROW.
Figure 2.20 analyses in more details changes of TFP
for the EU Member States and the US.
87
The US has
improved its TFP both with respect to 2000 and since
the beginning of the crisis. This hints to a stronger
resilience of the US economy as compared to Europe.
A wide majority of the European Member States
performs better compared to their 2000 level of
productivity. This is particularly true for some of the
new Member States (represented by blue circles),
which is an evidence for convergence, in some cases
from low starting levels. Yet, the convergence trend
seems to be weaker since the beginning of the crisis.
(
87
)
The horizontal axis shows changes in the period 2008-2014,
i.e. the evolution since the start of the financial crisis. The
vertical axis shows the long-run change for the period 2000-
2014.
36
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1560448_0013.png
2.2
Overall evolution of productivity
Figure 2.20:
Changes in Total Factor Productivity
7
LV
6
5
RO
LT
SK
Change 2000 -2014
HU
CZ
4
3
SE
BG
AT
DK
DE
PL
EE
US
SI
FI
EL
-2
-1,5
HR
MT
-1
CY
IT
-0,5
NL
LU
2
UK
IE
1
FR
BE 0
0 PT
-1
-2
ES 0,5
1
1,5
2
Change 2008-2014
Note:
Solow Residuals in log, total changes for the periods considered
Source:
European Commission, EU Structural Change 2015, DG GROW.
The crisis had different impacts on TFP across
Member States. Today still more than half of EU
Member States have not yet managed to recover their
pre-crisis levels (i.e. they are in the left half of the
figure), with Greece, Italy, Luxemburg and Cyprus
being at or below their 2000 level. For Spain, Italy
and Luxembourg, TFP started to decline or stagnated
long before the crisis. In the case of Spain the
positive development after the crisis could only just
offset pre-crisis losses in productivity with regard to
2000. On the other end of the spectrum, some
Member States have recorded considerable gains
even during the crisis, such as Slovakia, Poland, the
Baltic countries, Ireland and Denmark. Overall, the
crisis did not interrupt their longer-term TFP
performance. Romania stands out with large TFP
gains relative to 2000, but the crisis seems to have put
it on halt.
Benchmarking with the US
European producers face relatively high input prices,
especially as labour and capital are concerned. A
recent study by the Boston Consulting Group
88
compares the evolution of production costs in the EU
and in 10 of the most dynamic US States and with
relatively lower labour costs. The study shows that
productivity increases can compensate higher input
costs, especially as regards labour costs. Energy
(
88
)
Sirkin, H.L., Zinser, M., Rose, J.R. (2014),
The Shifting
Economics of Global Manufacturing,
Boston Consulting
Group ('BCG study').
costs, especially higher gas cost prices, seem to be
more difficult to offset than higher input prices.
Using a similar methodology, Figure 2.21 compares
the cost competitiveness of 26 EU Member States
(data are not available for Malta and Cyprus) with the
US in 2014. We also use labour productivity per hour
and different energy input prices from the
International Energy Agency (IEA). This explains the
differences in the results between the two studies.
89
Figure 2.21:
Others
1,3
Industry cost index by input
components: EU vs US
Labour
Electricity
Gas
2004 level
1,2
1,1
1
0,9
0,8
0,7
Source:
Own calculations with Eurostat and IEA data.
(
89
)
Here we use a different sectoral definition to the one used by
the BCG study taking industry defined as the difference
between groups B and E in NACE. Prices for electricity and
gas concern industrial consumers and exclude taxes.
U…
B…
B…
C…
D…
G…
E…
I…
G…
S…
F…
C…
It…
L…
L…
L…
H…
N…
A…
P…
P…
R…
S…
S…
F…
S…
U…
37
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1560448_0014.png
2.2
Overall evolution of productivity
Figure 2.22:
Changes in Industry Cost Index
2004-2014, labour component
% Ch. in relative hourly wages
% Ch. in relative hourly productivity
% Ch. in exchange rate USD
% change 2004-2014 total
Thus, productivity growth and resource efficiency can
compensate to some extent for higher input prices
within Europe. However, this requires further
investment. This may have an impact on the cross-
sectoral reallocation of resources in the near future.
Figure 2.23:
Changes in Industry Cost Index
2004-2014, electricity component
160%
140%
120%
% change 2004-2014
100%
80%
60%
40%
20%
155%
135%
115%
95%
% change in relative energy efficiency (electricity)
% change in relative USD prices
% change 2004-2014 total
% change 2004-2014
0%
-20%
-40%
75%
55%
35%
15%
-5%
USA
Belgium
Bulgaria
Czech Republic
Denmark
Germany
Estonia
Ireland
Greece
Spain
France
Croatia
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Hungary
Malta
Netherlands
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Finland
Sweden
United Kingdom
Source:
Own calculations with Eurostat and IEA data.
US
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
HR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
This comparison shows that lower labour costs still
allow several Member States to remain below the US
benchmark of competitiveness in 2014. The figure
also shows the difference in total costs in 2014 with
2004. Total costs have increased in all Member States
but these cost increases have been more limited in
Germany, Austria, Spain, Hungary, Portugal, Sweden
and the UK.
Figure 2.22 gives a more detailed account of the
evolution of labour costs. In many Member States,
the change between 2004 and 2014 in the labour
component of production costs has been below the
increase in hourly wages. The factors behind this
evolution are very different across countries though.
Reductions in wages per hour have contributed to
smaller increases in the labour component of
production costs in Greece, Luxembourg and the UK,
and slightly less in Germany and Portugal.
Improvements in the productivity per hour have been
a major factor limiting labour costs in Bulgaria,
Czech Republic, Estonia, Latvia, Lithuania, Hungary,
Malta, Poland, Romania, Slovenia and Slovakia. The
exchange rate has been a significant factor in
Hungary and the UK, too.
Over the last ten years, reductions in the energy
component of production costs have been limited.
Energy prices are the main driver of this cost
component. Only in very few cases, energy
efficiencies have been capable of reducing the
contribution of energy to production costs (Figures
2.23 and 2.24).
-25%
Source:
Own calculations with Eurostat and IEA data.
Figure 2.24:
Changes in Industry Cost Index
2004-2014, natural gas
component
% change in relative energy efficiency (gas)
% change in relative USD prices
% change 2004-2014 total
325%
275%
% change 2004-2014
225%
175%
125%
75%
25%
USA
Belgium
Bulgaria
Czech Republic
Denmark
Germany
Estonia
Ireland
Greece
Spain
France
Croatia
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Hungary
Malta
Netherlands
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Finland
Sweden
United Kingdom
-25%
Source:
Own calculations with Eurostat and IEA data.
38
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1560448_0015.png
2.3
Sources of productivity growth
make full use of all four, while 41 % are not using
any of them.
92
Also as regards other advanced technologies, EU
companies are not adopting such technologies fast
enough or in enough scale. A recent survey
93
shows
that almost half of European manufacturing
companies have not used advanced manufacturing
technologies
94
in the past and do not plan to use them
in the next year.
Europe is however a global leader in advanced
manufacturing technologies in terms of the share of
patents but also in terms of the share in total exports.
Europe also has a high and increasing trade surplus
compared to East Asia and North America in this
sector. A main reason for the good performance of
the EU in advanced manufacturing components is
that new technological solutions in Advanced
Manufacturing Technology rest on the integration of
other technologies (such as micro- and
nanoelectronics, advanced materials or photonics)
into complex products where Europe has a
comparative advantage. Moreover, the EU can benefit
from its long history in developing and applying
advanced technologies in manufacturing, and a dense
network of Advanced Manufacturing Technology
producers and users.
95
However, when considering a broader set of new
technologies,
the
so-called
Key
Enabling
96
Technologies (KETs) , Europe's performance lacks
(
92
)
(
93
)
(
94
)
IDC-EY 2013
Digital Entrepreneurship Monitor,
https://ec.europa.eu/growth/tools-databases/dem/monitor
European Commission (2015),
Innobarometer survey on
innovation trends at EU enterprises,
Flash Eurobarometer
415.
"Advanced
manufacturing
technologies"
comprise:
Sustainable manufacturing technologies (i.e. technologies
which use energy and materials more efficiently and
drastically reduce emissions); ICT-enabled intelligent
manufacturing (i.e. technologies which digitalise the
production processes); High performance manufacturing
which combines flexibility, precision and zero-defect (e.g.
high precision machine tools, advanced sensors or 3D
printers).
First annual report of the KETs Observatory:
https://ec.europa.eu/growth/tools-
databases/ketsobservatory/sites/default/files/library/kets_1st
_annual_report.pdf
Six Key Enabling Technologies have been identified as
important for Europe's future competitiveness: Advanced
Manufacturing
Technologies,
Advanced
Materials,
2.3.1
Digitisation and other advanced
technologies
The adoption of a particular technology may have an
impact on how efficiently input factors are combined.
Accordingly, the use of advanced technologies
available may foster the long-term growth of a sector
by lowering costs, improving quality and ultimately
promoting competitiveness. In recent years, digital
technologies are redefining traditional business and
production models, resulting in a wide range of
product and service innovations. In this way,
digitisation has the potential to unfold a catalytic
impact on the productivity of large companies and
SMEs alike. Ensuring adequate standards in this area
is important for keeping and enhancing the
comparative advantage of the EU industries, as
shown in the economic analysis underpinning the
Single Market Strategy.
90
While the digitisation of EU businesses and digital
entrepreneurship have
increased,
significant
differences remain across Member States.
91
Moreover, taking into account four advanced
technologies (mobile internet, social networks, cloud
and big data), overall only 2 % of EU enterprises
(
90
)
(
91
)
Cf. European Commission, (2015),
A Single Market Strategy
for Europe – Analysis and Evidence,
SWD(2015) 202 final.
As measured by the relevant sub-dimension of the indicator
"Integration of Digital Technology" which is part of the
Digital Economy and Society Index (DESI). Indeed, the
DESI 2015 groups Member States according to their
performance in four clusters:
- High performance (Denmark, Sweden, the Netherlands and
Finland): These countries are not only ahead in the EU, but
they are world leaders in digital.
- Medium-performance (Belgium, the United Kingdom,
Estonia, Luxembourg, Ireland, Germany, Lithuania, Spain,
Austria, France, Malta and Portugal): These countries are
doing well in certain areas but still need to progress in
others.
- Low performance (The Czech Republic, Latvia, Slovenia,
Hungary, Slovakia, Cyprus, Poland, Croatia, Italy, Greece,
Bulgaria and Romania): These countries need to step up
their performance in a number of areas and catch up with the
rest of the EU.
http://ec.europa.eu/digital-agenda/en/desi
(
95
)
(
96
)
39
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1560448_0016.png
2.3
Sources of productivity growth
the lustre it has in Advanced Manufacturing
Technology, one of the six KETs. East Asian
economies strongly develop their own scientific &
technological assets in key enabling technologies,
with a global share of KET-related patent applications
reaching 44 % in 2011. Europe's share in KETs
development has progressively declined from 32 % of
patent applications in 2000 to 27 % in 2011 (23 % for
North America). Also with regard to performance in
trade, East Asia experienced a sharp increase in total
exports of KETs-based components and intermediary
systems during the last decade, holding now a share
of about 57 % compared to 23 % for the EU-28 and
20 % for North America. Europe succeeded however
in holding its trade share relatively constant over the
past decade.
Among the EU Member States, Germany holds the
strongest position in all KETs. In general, Germany
performs well above the other European countries in
terms of share of patents, share of production, share
in total export, and share in turnover. France, Italy
and the UK are often among the top five of each KET
for several indicators, while Member States like
Belgium and Denmark have excellent positions in
individual KETs. In terms of trade balance, only
Germany, the Netherlands, Belgium, Ireland and
Austria have a trade surplus in all six KETs.
2.3.2
R&D and innovation
R&D expenditure as innovation input
In the monitoring of innovation processes, both inputs
and outputs need to be considered. Research and
development (R&D) expenditures can be regarded as
the main input indicator. On the public sector side,
government efforts in R&D investment have been
largely upheld over the course of the crisis. In about
half of EU Member States, the government budget for
R&D grew faster (or decreased less) than GDP
despite severe budgetary constraints.
97
In parallel,
private R&D expenditure as a share of GDP slightly
increased between 2008 and 2013. As a result, gross
domestic expenditure on R&D (R&D intensity)
increased from 1.85 % in 2008 to 2.02 % in 2013
(Figure 2.25). Indeed, at the onset of the economic
crisis, EU R&D intensity increased to 1.94 % in 2009
as many EU Member States made an effort to
maintain public R&D investment to counter the
impacts of the crisis on private investment. This
increase is remarkable as it followed a relative
stagnation around 1.77 % for the period 2004 to
2007. R&D intensity has then continued to grow
marginally since 2011. However, it still remains
significantly below the target of 3 % by 2020,
pointing to the need for additional investment
efforts.
98
In absolute terms, investment in research
and innovation has actually decreased during the
crisis and remains too low.
(
97
)
(
98
)
Nanotechnology, Micro- and Nanoelectronics, Industrial
Biotechnology and Photonics. Cf. European Commission
(2009),
Preparing for our future: Developing a common
strategy for key enabling technologies in the EU,
COM(2009) 512 final.
If the indirect efforts (e.g. in the form of tax incentives) are
added, an even larger number of Member States have
achieved genuine smart fiscal consolidation.
The Europe 2020 strategy sets the aim of increasing
combined public and private R&D investment to 3 % of
GDP by 2020.
40
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2.3
Sources of productivity growth
Figure 2.25:
3,5
R&D expenditure on GDP (%) in the EU
Gvt R&D on GDP 2008
3,0
Total R&D on GDP 2008
2,5
2,0
1,5
Gvt R&D on GDP 2013
Total R&D on GDP 2013
1,0
0,5
0,0
FI SE DK DE AT SI BE FR EU NL CZ EE UK IE HU PT IT ES LU LT PL MT SK HR EL BG LV CY RO
Note:
For IE total R&D expenditure data refers to 2012; for EL government expenditure on R&D refers to 2007.
Source:
Eurostat
Innovation performance in the aftermath of the crisis
In fact, the crisis has left a notable impact on the
private sector's innovative activity, with the
commercial uptake of innovations constituting a
particular weakness. The number of innovative firms
is in decline, as are SMEs’ innovations, patent
applications, exports of high-tech products, venture
capital investments, and sales of innovative products.
While there have been improvements in human
resources, business investments in research and
development and the quality of science, these are not
enough to result in an overall stronger innovation
performance. This poses serious risks for the long-
term growth potential of the EU, as do other aspects
relevant to innovation performance.
The sharpest declines in the share of innovative
businesses have been observed in Cyprus, Germany,
Romania, the Czech Republic and Spain. On the other
hand, the share of innovative enterprises increased the
most in Malta, the Netherlands, Latvia and the United
Kingdom. During the period 2010-2012, the highest
share of enterprises with innovation activity was
recorded in Germany (66.9 % of enterprises),
Luxembourg (66.1 %) and Ireland (58.7 %). On the
contrary, less than 30 % of enterprises had innovation
activity in that period in Romania (20.7 %), Poland
(23.0 %) and Bulgaria (27.4 %).
99
From the perspective of SMEs, a lack of financial
resources is viewed as the main problem in the
commercialisation of innovative products or services.
In this context, the few innovative businesses that
receive public financial support for R&D or other
innovation activities consider it as not effective
enough.
100
As explained in the Commission Staff
Working Document accompanying the Single Market
Strategy
101
, the difficulty in accessing and enforcing
Intellectual Property Rights (IPR) also deters SMEs'
investments in innovation. The significant cost
exposure for IPR and patent litigation is a serious
deterrent for SMEs to engage in patenting.
On EU level, the average annual growth rate of
innovation performance (as measured by the
Innovation Union Scoreboard) has reached 1.0 %
with most Member States improving their innovation
performance over the eight-year period 2007-2014.
However, compared to last year, innovation
performance has increased for only 15 Member
States, while it has declined for 13 Member States.
Overall, innovation performance has been converging
(
100
)
In the Innobarometer 2014, 91 % of surveyed companies
said that they had not received public financial support for
R&D or other innovation activities since January 2011. For
companies that received public financial support of some
kind there was an even split between those who said this
support was important for developing innovations (48 %)
and those who said the support was not important (49 %).
Cf. Innobarometer 2014: The role of public support in the
commercialisation of innovations, European Commission.
Cf. European Commission, (2015),
A Single Market Strategy
for Europe – Analysis and Evidence,
SWD(2015) 202 final.
( )
99
(
101
)
Community Innovation Survey 2012.
41
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1560448_0018.png
2.3
Sources of productivity growth
across Member States but performance differences
remain high.
102
It is particularly noteworthy that the most innovative
countries perform best on all dimensions: from
research and higher education systems, through
business innovation activities and intellectual assets
up to innovation in SMEs and economic effects,
reflecting balanced national research and innovation
systems. Yet, the level of development and structural
conditions of the relevant country, region and sector
should be taken into account when designing
innovation policies. These factors determine the
capacities to access, absorb and create new
technologies.
103
Effective innovation policies must
therefore take into account the specificities of the
relevant country, region and sector.
International comparison
When looking at the performance of innovation
systems in a global context, South Korea, the US and
Japan have a performance lead over the EU. While
EU innovation performance has been improving at a
higher rate than in the US and Japan, the innovation
gap with South Korea is widening (Figure 2.26).
Figure 2.26:
Innovation performance gap
with non-EU countries (EU=100)
South Korea
US
Japan
140
135
130
125
120
115
110
105
100
2007
2008
2009
2010
2011
2012
2013
2014
Source:
European Commission,
Innovation Union Scoreboard
2015,
DG GROW.
South Korea, the US and Japan strongly outperform
the EU in business R&D expenditure, and, to a lesser
extent, in public-private co-publications. Firms in
these countries invest more in research and
innovation, and the collaborative knowledge-creation
between public and private sectors is better
developed.
104
The difference in the share of business R&D
expenditure between the EU, on the one hand, and
South Korea (222 % of EU value), Japan (199 %) and
the US (151 %), on the other hand, is striking. As
concerns the level of R&D intensity per sector, the
EU shows a higher intensity than the US in very few
sectors, in particular computer electronic and optical
products, electrical equipment, and chemicals.
Although the overall ranking across sectors is very
similar, American firms, on average, tend to invest
much more than European firms in innovation and
technology. This is a matter of concern.
Manufacturing represents 64 % of total R&D
expenditures in the EU, while the services sector
accounts for 34 % of them.
105
In comparison with the
US, the EU focuses more on motor vehicles while the
former invests a larger share in high-tech sectors like
computer, electronic and optical products, and
pharmaceuticals. This signals a different type of
specialisation. In other sectors, the differences are
(
104
)
(
105
)
European Commission,
Innovation Union Scoreboard 2015.
2011 data for all EU Member States except: Malta, Bulgaria,
Lithuania, Latvia, Cyprus, and Croatia. The remaining share
corresponds to the energy sector (1 %), the primary sector
and mining (0.5 %), and construction (0,5 %). Source: own
calculations based on OECD statistics.
(
102
)
(
103
)
European Commission,
Innovation Union Scoreboard 2015.
The Innovation Union Scoreboard measures the performance
of EU national innovation systems. It groups Member States
into four different performance groups:
- “Innovation leaders” with innovation performance well
above the EU average (Denmark, Finland, Germany,
Sweden);
- “Innovation followers (Strong innovators)” with innovation
performance above or close to the EU average (Austria,
Belgium, France, Ireland, Luxembourg, Netherlands,
Slovenia and the UK);
- “Moderate innovators” with an innovation performance
below the EU average (Croatia, Cyprus, Czech Republic,
Estonia, Greece, Hungary, Italy, Lithuania, Malta, Poland,
Portugal, Slovakia and Spain); and
- “Modest innovators” with innovation performance well
below the EU average (Bulgaria, Latvia and Romania).
Cf. EBRD, (2014),
Innovation in transition,
Transition
report 2014, November 2014.
42
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1560448_0019.png
2.3
Sources of productivity growth
less relevant in magnitude, pointing to a more similar
pattern.
Figure 2.28:
Growth in total exports of goods
and services to the EU and to the
rest of the world (2004-2014)
40,0
Change in export intensity over GDP 2004-2014 in ppts
2.3.3
The external competitiveness of EU
firms
35,0
30,0
25,0
20,0
15,0
10,0
5,0
0,0
-5,0
0,00%
GR
BG
LT
HU
CZ
EE
SK
LV
NL
SK
IE
Driven by improvements in productivity in some
Member States and by the internal devaluation, EU
exports have increased considerably after the crisis
with respect to the 2004-2008 period. This expansion
applies equally to goods and services. However, there
are big differences in the export performance of
Member States within and outside the EU. The
vigorous growth in global demand resulted in an
increase of extra EU exports of goods of 28 % in the
2010-2014 period compared to the five years previous
to the crisis. A more subdued internal demand limited
sales to other Member States growing just at a 3.5 %
rate within the Single Market.
Figure 2.27:
Growth in total exports of goods
to the EU and to the rest of the
world (2004-2014)
LT
28,0
PO
PL
DE
EU
HR
RO
BE
DK
AU
ES
IT
UK
FR
SE
FI
CY
20,00%
40,00%
60,00%
80,00%
100,00%
Total exports of goods and services as percentage of GDP in 2004
Source:
Eurostat
33,0
Change in export intensity over GDP 2004-2014 in ppts
CZ
23,0
HU
EE
SK
18,0
LV
SK
NL
13,0
GR
HR
ES
3,0
CY
UK
FR
IT
DK
RO
AU
PL
DE
There is a very clear distinction in the exporting
performance of different Member States compared to
their results in 2004 (Figures 2.27 and 2.28). Seven of
the Central and Eastern European Member States
have improved their performance in a remarkable
way. Their exports to the EU and to the rest of the
world have increased by over 20 percentage points.
Ireland and the Netherlands are the only EU-15
countries exhibiting a comparable performance.
These have and remain very open countries with a
high degree in the internationalisation of their
activities. There are just two EU Member States
where exports have contracted in the last decade:
Finland and Cyprus.
The situation looks similar when focussing on the
exports of goods, but the growth rates are relatively
more modest with a maximum growth of exports of
around 30 percentage points in Lithuania. Obviously,
this implies a relatively faster expansion in the
exports of services. Finland and Sweden are the two
countries reporting export contractions as far as goods
are concerned.
As explained in the next chapter, the EU is now
integrating faster with third countries than internally,
which reflects the globalisation process and the faster
demand growth in many emerging markets. There is
however no trade-off between intra-EU trade and
global trade. Member States which integrated further
8,0
PO
BE
IE
-2,00,0%
10,0%
20,0%
30,0%
FI
40,0%
SE
50,0%
60,0%
70,0%
-7,0
Total exports of goods only as percentage of GDP in 2004
Source:
Eurostat
43
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1560448_0020.png
2.3
Sources of productivity growth
in the global economy are also those that have shown
the highest integration dynamics within the EU.
106
and extra-EU trade in goods (measured as change between
2004-2008 and 2010-2014 in percentage points of GDP)
across the Member States.
(
106
)
There is indeed a positive correlation (0.5) between EU trade
Figure 2.29:
EU manufacturing sectors: revealed comparative advantage (2013)
Note:
Low technology (LT), Medium-low technology (MLT), Medium-high technology (MHT), High technology (HT) in accordance
with Annex 3 of Eurostat (2014)
Source:
EU Structural Change (2015)
Among the Member States with an increasing
integration in the Single Market, most of them have
experienced an improvement of their price
competitiveness position.
107
Some of these countries
(Estonia, Latvia, Romania as well as Luxembourg)
benefited from improving the quality of their exports
as well.
108
As regards the group with decreasing or
stagnating integration, Belgium, Luxemboug, Malta,
Finland
and Greece suffered from cost
competitiveness losses. Only Finland and Sweden
exported less in 2010-2014 than in 2004-2008.
Ireland leads the table in services exports, followed
by Portugal, France, Malta and Belgium. Bulgaria,
Cyprus, Italy, Slovakia and Croatia are the only
countries presenting worse results in 2010-2013 than
in 2004-2008.
The importance of export growth for the EU in recent
years has been considerable. EU exports have been
growing above the world trade index since the crisis.
External demand has contributed by around 3 % to
GDP in the early years of the recovery and has
compensated the negative contribution of internal
demand in 2012 and 2013. Although energy prices
have been a disadvantage for the international
competitiveness of EU firms, the evolution of unit
labour costs has contributed to improve it. But this
has not been the only factor supporting our export
performance.
(
107
)
(
108
)
Measured as depreciation of real effective exchange rate vs.
EU-28 with unit wage cost, manufacturing as deflator. See:
http://ec.europa.eu/economy_finance/db_indicators/competit
iveness/data_section_en.htm
See Vandenbussche H. (2014),
Quality in Exports,
Economic Paper 528, DG ECFIN, European Commission.
44
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2.3
Sources of productivity growth
Figure 2.30:
EU services sectors: revealed comparative advantage (2013)
Note:
Knowledge-intensive services (KIS) are defined in accordance with Annex 8 of Eurostat (2014)
Source:
Own calculations based on WTO data
As shown in Figure 2.29, the EU has a comparative
advantage in high-tech sectors (pharmaceuticals),
medium-high tech sectors such as machinery and
transport equipment, including motor vehicles and
low-tech sectors (paper, print and beverages). Over
the last twenty years, European comparative
advantage has remained stable in most sectors but
some improvements can be reported in the motor
vehicles, the paper and printed product and the
machinery value chains.
109
Given their nature, revealed comparative advantages
can only be reported for a limited number of traded
services sectors in Figure 2.30. Europe has a high
comparative advantage in personal, cultural and
recreational services but it has also a strong
specialisation in financial services. ICT and business
services that have a crucial importance for
manufacturing and other business activities seem to
have a positive but relatively low comparative
advantage level.
The evolution of comparative advantage is clearly
path dependent and this is an important fact to take
into account in the design of policies; a background
study presents a detailed account of the evolution of
specialisation at NUTS 2 level for low to high-tech
sectors. A snapshot of this analysis for business
services in presented in Box 2.1 below.
Box 2.1: Revealed advantages in value added
exports of the business services sector
Over a long time period, Europe has succeeded to
be better than the USA and Japan in maintaining
relatively high market shares in world trade. The
share of the EU in global exports has fallen by 3.5
percentage points (ppt) between 1995 and 2013
while it has decreased by 8.9 ppt for Japan and 4.7
ppt for the USA. China with over 13 ppt gain in the
share of global exports is the main beneficiary of
the losses reported by the other main global
trading partners. In some cases, such as transport
equipment, the EU's world market share has
increased by 5.2 ppt from 1995 to 2013. Europe
has also succeeded in maintaining its comparative
advantage in sectors such as machinery and
chemicals, but not in the upcoming digital and
communication technologies.
(
109
)
Timmer, M.P., Los, B., Stehrer, R. and de Vries, G.J.
(2013),
Fragmentation, incomes and jobs: an analysis of
European competitiveness,
Economic Policy, 28(76), 613–
661.
45
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2.3
Sources of productivity growth
The graph shows the geographical distribution of
regional revealed advantages in value added
exports for
business
services in
2011. In the
context of
the analysis,
business
services are
understood
to comprise
the
following
elements: a)
the renting
of
machinery
and
equipment,
b) computer
and related activities, c) research and development
and d) other business activities such as legal and
accounting
activities,
tax
and
business
consultancy, market research. They do not include
financial services such as banking and insurance.
In the EU, there is a clear geographical divide, as
the high income countries and regions tend to have
revealed advantages in the value added exports of
business services, while the less developed
countries and regions in the South (Greece,
Portugal and Spain) as well as in the East have
revealed disadvantages.
Exceptions to this are the capital city regions,
Figure 2.31:
Market shares in unit value segments
especially in the CEE countries. Accordingly,
revealed advantages in business services exports
are highly correlated with GDP per capita levels.
This correlation and the generally low
competitiveness of business services in the
peripheral regions are of direct policy relevance,
as it opens up the possibility to design concrete
policy measures targeting the development of such
services in the less developed EU regions. Such
policies not only would improve those regions’
competitiveness in business services, but at the
same time would also create additional
employment and contribute to the general
economic development of those regions, as
improved business services would have positive
repercussions on the manufacturing industry
sectors, via R&D and the transfer of knowledge,
increases in the technological capacities,
marketing etc. As a final consequence, such
targeted policies would thus also contribute to
economic cohesion of the EU regions.
Revealed value added specialisation of exports
(RXA) – Value added exports: Business services,
2011
Source: Cordes et al. (2015)
This is a relatively good performance in a world with
many and powerful emerging economies like China
and stronger competition from the USA. Europe's
export performance is particularly remarkable given
its relative input price disadvantage.
Source:
Stehrer et al. (2015)
46
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2.3
Sources of productivity growth
Quality competition and moving up the ladder in the
value added contents of the activities carried out in
medium-tech sectors seems to be contributing to
sustain EU competitiveness. This appears to be
confirmed by evidence provided by the analysis of
the qualitative changes in the contents of our exports
based on their unit values. These values can be
interpreted as quality-adjusted price of products and
provide a better insight of the changes in the
composition of EU exports.
Figure 2.31 presents the market shares of the EU,
USA, Japan and China in 1995, 2005 and 2013 for
exports with high, medium and low unit value. Figure
2.32 shows the contribution to manufacturing exports
and to high unit value export segment by Member
Figure 2.32:
State. The former figure shows a higher and even
growing market share of EU exports in the high unit
value export segment. These results point out in a
similar direction as Vandenbussche H. (2014).
However, the EU competitiveness could be further
enhanced by reducing the existing barriers on
allocative efficiency, which negatively impact
competition in a number of Member States, as
pointed out in the Staff working document
accompanying the Single Market Strategy.
110
(
110
)
Cf. European Commission, (2015),
A Single Market Strategy
for Europe – Analysis and Evidence,
SWD(2015) 202 final.
Contribution to total manufacturing exports and to high unit value export segment by
country (2013)
Note:
Countries ranked according to market shares in 2013
Source:
Stehrer et al. (2015)
2.3.4
Other factors contributing to
productivity
Infrastructure and networks
Efficient infrastructure and network industries (e.g.
energy, transport and broadband) are fundamental for
a competitive business environment. However, the
quality and availability of these production inputs still
varies considerably across the EU.
Overall, the quality of transport infrastructure in the
EU increased slightly over the last five years. The
new Member States continue to catch up and
significant investment has taken place in the context
of cohesion policy since 2007. By contrast, there are
indications of under-investment in most advanced EU
economies since 2009 (Austria, Belgium, Germany,
Finland, France, Luxembourg, the Netherlands,
Denmark, Sweden and the United Kingdom).
111
Member States' budgets allocated to maintenance
were often not sufficient to prevent a deterioration of
the existing network.
The availability of fixed broadband infrastructure,
which is crucial for digital markets, has progressed
moderately but steadily. However, fixed rural
(
111
)
European Commission,
Infrastructure in the EU:
Developments and Impacts on Growth,
Occasional paper
203 (2014).
47
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2.3
Sources of productivity growth
coverage is still below 80 % in five Member States,
and remains a challenge in Member States such as
Bulgaria, Finland, Latvia, Poland and Slovakia, with
some progress registered in Croatia, Slovenia and
Romania. Whilst more than two thirds of the EU
households are covered by high speed broadband,
Italy, Croatia and Greece need to upgrade most of
their networks to keep pace.
Upgrading and better connecting the energy
infrastructure are among the key objectives of the
Energy Union Strategy. The work on infrastructure
projects has accelerated in recent years and many
Member States have launched large-scale projects
which are now in the implementation phase,
including the "Projects of Common Interest"
identified in 2013 under the trans-European energy
networks Regulation (TEN-E).
112
Cleantech economy
European manufacturing firms spend on average 40
% of their costs on raw materials, with energy and
water pushing this to 50 % of total manufacturing
costs, to be compared to a share of 20 % for labour
costs. (
113
) Resource efficiency is thus an important
driver of innovation and competitiveness and will
play a crucial role for industry to open up new
markets. Resource productivity varies considerably
across Member States due to their different GDP
levels, their stages of economic development, and the
structure of their economies. Countries showing
highest values in resource productivity include the
Netherlands, Luxembourg, the UK, Spain and Italy.
The lowest resource productivity can be observed in
Finland, Latvia, Bulgaria, Estonia and Romania.
Energy intensity in the industry is the lowest in
Ireland and Denmark whilst Lithuania and Bulgaria
have the highest energy intensity.
Boosting productivity, employment and economic
growth, while exploiting the benefits of energy and
resource efficiency and the green economy is a
challenge and an opportunity in many Member States.
For example as regards eco-innovation, the gap
between the best performers (including Sweden,
Finland, Germany, Denmark and the UK) and the
(
112
)
European Commission, (2015),
Energy Union Package: A
Framework Strategy for a Resilient Energy Union with a
Forward-Looking Climate Change Policy,
COM(2015) 80
of 25 February 2015.
Europe INNOVA, Guide to resource efficiency in
manufacturing: experiences from improving resource
efficiency in manufacturing companies, 2012.
Member States lagging behind (including Bulgaria,
Poland and Cyprus) remains significant. Accelerating
the market uptake of eco-innovations in all sectors
could be effectively promoted by addressing the
obstacles faced by eco-innovative businesses and
through supporting market replication and clusters of
SMEs, developing targeted financial instruments, and
the public procurement of cleantech innovations.
Skills
Long-term growth can be achieved by improving the
quality of labour input since highly qualified workers
can help firms innovating and make the best use of
high-tech processes. Human capital is not a perfectly
substitutable input which can be transferred between
sectors at no cost. It is therefore an input factor which
can explain differences in growth across countries,
although it is not easy to measure.
Most European countries are faced with skills
challenges, as a consequence of the ongoing
structural changes taking place in their economy. For
instance, in the period 2008-2013, the share of low-
skilled workers has decreased for all sectors
114
,
whereas the share of high-skilled workers has slightly
increased. The overall picture for medium-skilled
workers is less clear, since roughly half of the sectors
experienced a decrease. This finding might be
explained in different ways. First of all, since the
level of education is generally increasing in Europe,
this can partly explain the general decrease of low-
skilled workers. Secondly, the economic and financial
crises may have hit stronger low pay jobs,
determining an overall decrease of low-skilled
workers (and medium-skilled workers in some
sectors), while high-skilled ones managed to keep
their position. Finally, labour hoarding is more likely
to be observed for highly educated and specialised
workers.
The availability of both high-skilled and medium-
skilled workers is critical for companies:
Manufacturing sectors that produce goods requiring a
high proportion of high-skilled labour are:
(
114
)
But a decrease of the share of low-skilled workers does not
necessarily correspond to a decrease of the number of low
pay jobs in employment. In fact, people can accept jobs for
which they are overqualified. The fact that the share of
medium-skilled workers increased in some low-skilled
intensity sectors like Accommodation and food service
activities or Agriculture, forestry and fishing may suggest
that some low-skilled low pay jobs have been taken by more
qualified workers.
(
113
)
48
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2.3
Sources of productivity growth
pharmaceuticals; computer, electronic and optical
industries; and coke and refined petroleum. While the
first two are sectors with high technological intensity,
coke and refined petroleum is classified as a mid-low-
tech sector. However, this sector has an above
average labour productivity, and is dominated by
large enterprises (more than 250 employees), mostly
operating in the global markets.
115
Service sectors among the most human-capital-
intensive include: education, information and
communication; professional, scientific and technical
activities; and financial and insurance activities.
Shortage of highly required professionals, such as
ICT programmers, poses increased risks to EU
competitiveness, especially in high-tech sectors, but
the shortage of ICT specialists is generally affecting
all sectors.
116
The lowest proportion of low-skilled labour
(4.67
%)
is found in financial and insurance activities, closely
followed by professional, scientific and technical
activities (4.7 %). More than 25 % of the workforce
(
115
)
For more information, see
http://ec.europa.eu/eurostat/statistics-
explained/index.php/Manufacture_of_coke_and_refined_pet
roleum_products_statistics_-_NACE_Rev._2.
European Commission,
A Digital Single Market Strategy for
Europe - Analysis and Evidence,
SWD(2015) 100 final, May
2015, page 69-73.
in chemicals, other transport equipment, beverages
and tobacco manufacturing are high-skilled. Low-
technology manufacturing industries such as textiles,
clothing, leather products and wood products employ
small proportions of high-skilled labour. The same
applies to labour-intensive service industries such as
accommodation and food, and agriculture and
forestry.
2.3.5
Integration in international value
chains
(
116
)
The overall trends in EU outsourcing over the period
2004–2011 indicate that the role of intra-EU
outsourcing has diminished both in industry and
services (Figure 2.33). The level of intra-EU
outsourcing in the industry has diminished in several
Eastern European EU Member States (LT, LV, BG,
EE, SK, SI, MT, CZ and HU) after the crisis. Similar
developments, though at a much lower scale, given
the lower starting point, were observed in services.
Similar trends were observed for extra-EU industry
outsourcing into Eastern EU Member States (Figure
2.34). On the contrary, the share of output supplied
by third countries in services increased in almost all
EU
Member
States,
indicating
increasing
involvement of third countries services' providers into
EU value chains.
Figure 2.33:
Level of intra-EU direct outsourcing across the EU Member States
Note:
Direct outsourcing only i.e. production inputs only from my suppliers but not from my suppliers' suppliers divided by total output
in the destination country. An outlier with a very high level of trade outsourcing in services (LU) is omitted.
Source:
WIOD
49
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2.3
Sources of productivity growth
Figure 2.34:
The level of extra-EU direct outsourcing across the EU Member States
Note:
An outlier with a very high level of trade integration (LU) is omitted. Trade= Imports +Exports/2*GDP.
Source:
WIOD
In general, larger countries use relatively less intra-
EU production inputs, both from industry and from
services, reflecting their sizeable domestic production
capacities. The UK, Italy, France and Spain were the
lowest users together with Greece of intra-EU
industry inputs, and these countries (UK, IT, FR)
together with Bulgaria and Germany were the lowest
users of intra-EU services. In contrast Hungary,
Belgium, Czech Republic, Malta and Slovakia were
the top five Member States with the largest level of
intra EU cross-border outsourcing of industry and
Luxembourg, Ireland, Malta, Belgium and Denmark
were the top five Member States with the largest level
of intra EU cross-border outsourcing of services.
50
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2.4
Conclusions
sectors with higher productivity growth. This could
increase the competitiveness of EU industrial and
service sectors thus boosting growth and job
creation. There is room for policy and structural
reforms to foster productivity growth by improving
the use of productive inputs (adoption of best
practices) and resource allocation (allocative
efficiency) across sectors, countries and regions.
Tackling the existing barriers in the Single Market
with EU-wide actions such as those proposed by
the Single Market Strategy will contribute to a
better allocation of resources across firms and
sectors. Yet, sector and country specific product
market reforms should also be adopted by Member
States in those cases where structural reforms must
take into account national and regional specificities
of the national or regional economic structure.
The innovation performance of Member States is
converging but only gradually. It is noteworthy that
more innovative Member States (Denmark,
Finland, Germany, Sweden) are hardly converging
amongst themselves, while innovation performance
amongst more modest innovators (Bulgaria, Latvia,
Romania) is even diverging. Moreover, several
Member States show poor results in business
innovation activity. Yet, it is precisely in this area
where the gap vis-à-vis global competitors is larger,
that one would expect more rapid growth. Effective
innovation policies must take into account the
specific conditions of the relevant country, region
and sector.
A major resource re-allocation across sectors is
taking place in most developed economies. This
structural transformation may lead to higher growth
and competitiveness if it is driven by technological
progress and efficient allocation of resources.
Yet, the convergence of productivity amongst EU
economies is stalling. As product and process
innovation may be running out of steam, this
slowdown reduces growth prospects. For certain
EU Member States the problems of declining or
stagnating TFP date back to before the crisis. For
countries like Italy, Spain and even France and
Belgium, the stagnation in terms of TFP in
manufacturing started long before the crisis,
providing strong evidence for structural rather than
cyclical problems. TFP performance is also affected
by the quality of factors of production, as
measured, for instance, by energy prices,
infrastructures, skills and technology.
Productivity can be increased by technological
progress (expansion of the technological frontier)
and by the adoption of existing technology
(catching up process by laggards). These processes
take place along national lines and across sectors.
However, policy distortions and regulatory
fragmentation can hamper them and lead to an
inefficient allocation of resources towards less
productive firms.
Fostering the completion of the Single Market
would facilitate the allocation of resources to the
51