Saturday, 30 April 2011

The Greek (un)competitiveness saga - part 3

This is the last part of the competitiveness series (I hope I’ll back that statement for at least one week), I’m sure that you’re bored of them anyway. 

To start with, I’ll put on the labour productivity growth chart again, since you’ll might want to take a look at it when reading the rest of the post.

source: OECD

Here we go. Apart from the factors that I mentioned in my previous post, another factor that affects productivity greatly is the factors’ sectoral distribution. This quite simply means that when factors are allocated in sectors whose added value is higher, then labour productivity tends to be higher as well.

I couldn’t find any detailed data about capital’s distribution among sectors but data about labour’s distribution among sectors are (in most cases) easy to come by. Unfortunately, OECD employment data for our beloved Greece run only from 1998 and on, so their ability to help us explain things is quite limited. 

I found another data source, namely the Groningen Growth and Development Center. There are two things about these data that make me skeptical. First, they only run up to 2007 and second, for the years that there are official data for Greece, these two do differ. I’m going to use them anyway since I am not interested in exact numbers, I only care about directional moves in sectoral employment. So, here is the chart.

source: Groningen Growth and Development Center

It is widely accepted that the shift of resources from agriculture to industry usually leads to higher labour productivity. The same goes for the shift of labour input from agriculture to services, the only difference being that after some point, labour productivity for the services industry tends to grow more slowly.

So, the (admittedly not that large) growth in productivity that Greece witnessed can be attributed, partly, to the shift of labour input from agriculture (mainly) to the services sector, since there wasn’t much of a shift into industry at any time.

When looking at the productivity growth chart, I get the impression that from 1999 up to 2004 there was a noteworthy productivity boost, in my view, due to the pre-Olympic Games build-up and the actual event (big push in tourism, retail trade, etc.). After that, productivity growth seems to slow down a bit, maybe in part  due to the shift of resources into the public sector where productivity is notoriously low.

Finally, one of the most important determinants of labour productivity is the economy’s capital stock. Here’s the relevant graph.

source: OECD

Given the large population differential between Greece and Ireland, this chart doesn’t enlighten us that much. What matters is the capital stock per employee.

source: OECD

Capital stock per employee is much higher for Ireland, which goes some way into explaining the much higher productivity that the country displays.

To wrap this up, besides having a lower capital stock than Ireland and all the other factors that I outlined in my last post, for Greece it really is a question about the sectors where resources are allocated. What dampens the headline labour productivity number is the fact that the vast majority of these sectors are characterized by relatively low added value, hence low productivity…