Regional Differences in Productivity Growth in the Netherlands - an Industry-level Growth Accounting

Main point in the current European policy debate is to find instruments that stimulate the growth rate of labour productivity. The reason for this is a persistent slowdown in labour productivity growth in European countries and an increasing gap in growth rates between the USA and Europe starting in the second half of the 1990’s. Labour productivity in the US is nowadays at a much steeper growth path than in Europe. What is the reason for this increasing gap between Europe and the USA? This is an important question in order to assess the measures proposed in the Lisbon Agreement by the European Union (EU) to become the world’s most competitive and dynamic knowledge-based economy in 2010. With increasing globalisation and deregulation of international markets, productivity growth is the tool to enhance competitiveness. Therefore instruments are sought that will get the productivity growth rate in European countries back on track. One of the main explanatory factors for productivity growth is the production, use and diffusion of information and communication technology (ICT). Inklaar et al. (2003) show, however, that the main source for the European slowdown in productivity growth is not so much lagging IT use, but a deceleration of non-ICT capital deepening (i.e. lagging increase of non-ICT capital per hour worked) and, in contrast to the US, a lack of acceleration of TFP growth. TFP growth is the part of productivity growth that cannot be attributed to an increase in the capital stock per hour worked, where capital is usually subdivided in ICT capital and non-ICT capital. Daveri (2004), who applies a more rigorous definition of ICT using and ICT producing industries, by and large corroborates these results. The deceleration of non-ICT capital deepening of the nineties in Europe has coincided with a sharp rise in employment. Non-ICT capital deepening, or the growth of non-IT capital per hour worked, is clearly related to the growth rates of the price of both inputs. Faster wage growth increases non-ICT capital deepening because capital will substitute labour. An increase in the ‘price’ of non-ICT-capital, on the other hand, makes capital more expensive and leads to deceleration of non-ICT capital deepening. Inklaar et al. (2003), however, show that the impact of growth rates of wage and rental prices on non-ICT capital deepening is much stronger for the US than Europe. The small effect of wage growth in European countries implies that wage moderation might be an important reason for the slowdown of non-ICT capital deepening. Labour productivity growth in The Netherlands is at a persistently lower growth path than the European average. Since The Netherlands has been champion in wage moderation in the past decades, a natural question is whether this has led to an even slower non-ICT capital deepening than Europe or that other mechanisms have instead caused the Dutch slowdown of productivity growth. This issue will be addressed at a low spatial level: what is the reason for the Dutch slowdown, are there regions that have contributed more to the lagging productivity growth rate than others and which industries are responsible. This question will be answered using the growth accounting approach, which is also used to explain the widening of the productivity growth gap between Europe and the USA. Distinction can be made at the provincial level of The Netherlands between growth rates of value added in constant prices, number of hours worked, ICT and non-ICT capital services for eight aggregate industries. There is therefore sufficient detail to determine which industry in which province contributes positively or negatively to the lagging Dutch growth performance of the late 1990’s. This issue is useful from both an academic and a policy perspective.