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Occasional Paper Series

Key factors behind productivity

trends in EU countries

Work stream on productivity, innovation and

technological progress

No 268 / September 2021

Disclaimer: This paper constitutes staff input into the Governing Council's deliberation in the context of the ECB's

monetary policy strategy review. This paper should not be reported as representing the views of the Eurosystem.

The views expressed are those of the authors and do not necessarily reflect those of the Eurosystem.

Acknowledgements

This report has been jointly produced by the Eurosystem work stream on productivity, innovation and technological

progress comprising staff from the European Central Bank (ECB) and the national central banks (NCBs) of the EU Member States. This work stream drew on a pre

-existing network of experts on productivity, innovation and technological progress that preceded the strategy review. The report

fed into the Governing Council's deliberations on the monetary policy strategy review 2020 -21.

The authors would like to thank Dirk Bursian, Marcus Jüppner, Philipp Lieberknecht and Arne Nagengast (Deutsche Bundesbank);

Juuso Vanhala (Suomen Pankki

- Finlands Bank); Maurice Bun (De Nederlandsche Bank); Beatriz Gonzalez Lopez (Banco de España);

and Annalisa Ferrando, Justina Gaizutyte and Charles O'Donnell (ECB) for their contribution to the background note on monetary policy

and productivity, which served as the basis for Sections 4 and 5 of this report. We would also like to thank Jan de Mulder (Nationale

Bank van België/Banque Nationale de Belgique

), Davide Fantino (Banca d'Italia), Maurice Bun (De Nederlandsche Bank), Juuso

Vanhala (Suomen Pankki

- Finlands Bank), Fernando Martins (Banco de Portugal) and Josip Raos (Hrvatska narodna banka) for their

pa rticipation in the micro

-distributed exercises of Sections 2.3 and 4.3. We would like to thank Ana Seco Justo and Rodrigo Barrela

(ECB) for their valuable research assistance.

Co-leads of the work stream

Wolfgang Modery

European Central Bank

Maria Teresa Valderrama

Oesterreichische Nationalbank

Coordinator and pen

-holder

Paloma Lopez-Garcia

European Central Bank

email: paloma.lopez-garcia@ecb.europa.eu)

Additional contributing authors

Maria Albani (co-author of Section 3)

Bank of Greece

Paloma Lopez-Garcia (co-author of Sections 1, 2, 4, 5 and 6)

European Central Bank

Sofia Anyfantaki (co-author of Sections 3 and 5)

Bank of Greece

Natalia Martín Fuentes (co-author of Section 5)

European Central Bank

Claudio Baccianti (co-author of Section 1)

European Central Bank

Philipp Meinen (co-author of Section 5)

Deutsche Bundesbank

Rodrigo Barrela (co-author of Section 4)

European Central Bank

Isabella Moder (co-author of Section 5)

European Central Bank

Katalin Bodnar (co-author of Section 5)

European Central Bank

Kaspar Oja (co-author of Section 2)

Eesti Pank

Maurice Bun (co-author of Section 4)

De Nederlandsche Bank

Christian Ragacs (co-author of Section 2)

Oesterreichische Nationalbank

Jan De Mulder (co-author of Section 3)

Nationale Bank van België/Banque Nationale de Belgique

Roehe Oke (co-author of Section 2)

Deutsche Bundesbank

Elisabeth Falck (co-author of Section 2)

Deutsche Bundesbank

Patrick Schulte (co-author of Section 3)

Deutsche Bundesbank

Gerhard Fenz (co-author of Section 2)

Oesterreichische Nationalbank

Ana Seco Justo (co-author of Section 3)

European Central Bank

Beatriz Gonzalez Lopez (co-author of Section 5)

Banco de España

Roberta Serafini (co-author of Section 5)

European Central Bank

Vincent Labhard (co-author of Section 5)

European Central Bank

Ralph Setzer (co-author of Sections 4 and 5)

European Central Bank

Julien Le Roux (co-author of Section 2)

European Central Bank

Irune Solera Lopez (co-author of Section 2)

Banco de España

Andrea Linarello (co-author of Section 2)

Banca d'Italia

Maria Teresa Valderrama (co-author of Section 5)

Oesterreichische Nationalbank

Juuso Vanhala (co-author of Section 4)

Suomen Pankki - FInlands Bank

This report is part of a set of papers within the ECB's Occasional Paper Series, related to the ECB's Strategy review 2020-21. This set

includes the following papers:

Set of Occasional Papers related to the ECB

's Strategy review 2020-21

No 263

"The implications of globalisation for the ECB monetary policy strategy".

No 264

, "Inflation expectations and their role in Eurosystem forecasting". No 265
"Inflation measurement and its assessment in the ECB's monetary policy strategy review".

No 266

"Digitalisation: channels, impacts and implications for monetary policy in the euro area". No 267

, "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement".

No 268
"Key factors behind productivity trends in EU countries".

No 269

, "The ECB's price stability framework: past experience, and current and future challenges". No 270

"Non-bank financial intermediation in the euro area: implications for monetary policy transmission and key vulnerabilities".

No 271
, "Climate change and monetary policy in the euro area". No 272

, "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area".

No 273
, "Monetary-fiscal policy interactions in the euro area". No 274
"Clear, consistent and engaging: ECB monetary policy communication in a changing world".

No 275

"Employment and the conduct of monetary policy in the euro area".

No 276

"The mandate of the ECB: Legal considerations in the ECB's monetary policy strategy review".

No 277

"Evolution of the ECB's analytical framework". No 278

, "Assessing the efficacy, efficiency and potential side effects of the ECB's monetary policy instruments since 2014".

No 279

"The need for an inflation buffer in the ECB's price stability objective - the role of nominal rigidities and inflation differentials".

No 280
, "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers". ECB Occasional Paper Series No 268 / September 2021 1

Contents

Abstract 4

Executive summary 5

1 Introduction 9

1.1 Why is productivity important for a central bank? 9

1.2 A conceptual framework for the analysis of productivity growth 11

1.3 Report road map 16

2 Productivity trends in the EU 18

2.1 Setting the stage: the macro picture 18

Box 1 Measuring TFP growth and its contribution to labour productivity growth: the importance of accounting for capacity utilisation 21
Box 2 Capital-intensity dynamics in the euro area 24

2.2 The role of resource reallocation across sectors in explaining

aggregate productivity trends 28

Box 3 Shift-share methodology 29

2.3 A sector productivity decomposition with market entry and exit 38

Box 4 Productivity decomposition 41

3 Technology and productivity growth 46

3.1 Technology and productivity growth in EU countries 46

Box 5 Case study: Technology diffusion in Belgium 47

3.2 Technology creation and diffusion in the EU 54

4 Reallocation of resources 64

4.1 The productivity cost of resource misallocation 64

4.2 Entry and exit of firms and productivity growth 69

4.3 Zombie firms: persistent resource misallocation or a necessary

temporary evil? 75

Box 6 Zombies - what are we talking about? 76

5 The role of monetary policy, structural trends and COVID-19 89

ECB Occasional Paper Series No 268 / September 2021 2

5.1 The interplay between monetary policy and productivity growth 89

5.2 Long-term trends with an impact on productivity growth 96

5.3 The impact of COVID-19 on productivity 106

Box 7 The impact of pandemics on TFP growth: a historical overview 108

6 Conclusions and research gaps 118

6.1 Conclusions: putting everything together 118

6.2 Possible implications for monetary policy 120

6.3 Research gaps 121

Bibliography 122

Annex 1: Macro drivers of TFP 142

A.1.1 Estimation methodology 142

A.1.2 Theoretical framework 142

Annex 2: The macro picture 145

A.2.1 Dynamics of hours worked per capita in the EU12 and other advanced economies 145 A.2.2 Measuring TFP growth and its contribution to labour productivity growth: the importance of accounting for capacity utilisation 147

A.2.3 TFP growth in EU27 countries over time 149

Annex 3: Sector analysis 151

A.3.1 Description of the data 151

A.3.2 Shift-share analysis for EU-old and EU-new 152

A.3.3 Sensitivity analysis 154

A.3.4 Productivity level differences across sectors and countries 155 A.3.5 Productivity convergence across countries 156 Annex 4: The role of within-firm productivity growth and resource reallocation 161

A.4.1 Data details 161

A.4.2 Contributions over time, by country 162

Annex 5: Productivity growth in sectors with varying technology intensity 164 ECB Occasional Paper Series No 268 / September 2021 3

A.5.1 Sector division by technology intensity 164

A.5.2 Labour productivity divergence across sectors of varying technology intensity 164quotesdbs_dbs27.pdfusesText_33

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