As in the previous post, Figure 1 is borrowed from our paper on productivity  (see Figure 4 in the paper). It presents the case of Austria. This is a less difficult example with the rate of productivity growth, dP/P, on a steady descent since the 1970s. Between 1975 and 2005, the rate of productivity growth is oscillating around the level of 0.015y-1. Notice the excellent prediction of the severe drop in the productivity after 1970. This fall was induced by an increase in the growth rate of real GDP per capita relative to its inertial level, as Figure 2 depicts. The elevated rate of real growth induced a higher increase in the rate of participation, and thus, the drop in productivity. It is worth stressing again that there was no shock to productivity or a structural break, as the mainstream economists would suggest. Our model presumes that labor productivity in Austria has been following the only driving force – real GDP per capita.
Figure 1. Observed and predicted (from real GDP pee capita) change rate of productivity in Austria. The observed curve is represented by MA(5) of original version. Model parameters are as follows: A2=$335, N(1959)=100000, B=-500000, C=0.243, T=3 year.
Lets return to the deviation from the inertial growth, which is unambiguously determined by constant annual increment of real GDP per capita. Figure 2 shows that the rate of inertial growth is decreasing with the increasing level of GDP as a reciprocal function of GDP. Coefficient A2 has to be determined empirically for each developed country. For Austria, the initial estimate was A2=$335 (1990 U.S. dollars at GK PPPs as presented by the Conference Board). The current economic and financial crisis manifests itself in a severe drop in GDP, with dGDP/GDP=-0.045 y-1 in 2009.
A significant feature of the model is the presence of a delay between the change in real GDP and the reaction of P. This effect is similar to the delay of thunder relative to lightning. Any economic system needs some time to adjust to the exogenous change. In Austria, productivity lags by 3 years behind GDP, as caption of Figure 1 indicates. For details of the model see . For the purpose of this blog, the three year lag means that the current drop in real GDP per capita will result in a hike in labor productivity three years later. Also, the currently observed decline in the rate of productivity growth is actually induced by several years of intensive real economic growth observed before 2009.
Figure 2. Comparison of the growth rate of real GDP per capita, dGDP/GDP, with the rate of inertial growth defined as A2/GDP.
Finally, Figure 3 tests the model by adding two new data points to Figure 1. These new measurements are borrowed from the Conference Board database . One can conclude that the model gave an excellent prediction for 2008 and 2009. The period of the productivity decline will continue in Austria for another couple years. Since 2012, the rate of productivity growth will show high positive values in response to the current drop in GDP and labor force particiaption. This will be a striking upturn which is always a challenge to any productivity model or concept. We will revisit the case of Austria for further validation of the model. In 2010 and 2011 the rate of labor productivity in Austria will be falling.
Figure 3. Same as in Figure 1 with two new points – 2008 and 2009. The original and MA(5) productivity series are shown. One can expect positive rate of productivity growth in 2012.
1. Kitov, I., Kitov, O., (2009). Modelling and predicting labor force productivity, MPRA Paper 15152, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15152/01/MPRA_paper_15152.pdf
2. Kitov, I., Kitov, O., (2008). The driving force of labor productivity, MPRA Paper 9069, University Library of Munich, Germany, http://ideas.repec.org/p/pra/mprapa/9069.html
3. Conference Board. (2010). Total Economy Database, January 2010. http://www.conference-board.org/data/economydatabase/