14. Productivity - labor and capital efficiency

In this supply side shock the efficiency of all factors increases, and the demand for all factors falls. Here, there is no substitution between factors. The experiment produces a general reduction in production costs, therefore, a long run gain in foreign trade and domestic production. Table 14 presents the effect of a permanent 1 percent increase in the efficiency of all factors.(See experiment)

 

Table 14. The effect of a permanent increase in labor and capital efficiency

    1. yr 2. yr 3. yr 4. yr 5. yr 10. yr 15. yr 20. yr 25. yr 30. yr
    Million 2005-kr.
Priv. consumption fCp 321 264 908 1900 2591 1785 222 27 680 1632
Pub. consumption fCo -42 -88 -172 -245 -302 -481 -592 -687 -774 -856
Investment fI -3772 -4627 -1533 773 1866 2237 906 466 709 1062
Export fE 2920 4537 6272 7914 9560 16393 20736 23370 24984 26027
Import fM -1339 -1478 665 2415 3418 4745 5108 5873 6756 7492
GDP fY 783 1456 4488 7469 9750 14479 15418 16515 17997 19470
    1000 Persons
Employment Q -16.58 -18.75 -16.94 -13.65 -10.22 -0.22 1.49 1.74 1.87 1.67
Unemployment Ul 8.81 9.31 8.24 6.57 4.88 0.07 -0.74 -0.85 -0.92 -0.82
    Percent of GDP
Pub. budget balance Tfn_o/Y -0.09 -0.18 -0.06 0.07 0.18 0.45 0.48 0.52 0.57 0.63
Priv. saving surplus Tfn_hc/Y 0.21 0.35 0.16 -0.03 -0.14 -0.20 -0.04 0.03 0.03 0.01
Balance of payments Enl/Y 0.12 0.17 0.09 0.04 0.04 0.24 0.44 0.55 0.60 0.64
Foreign receivables Wnnb_e/Y 0.54 0.91 1.05 1.09 1.12 1.75 3.24 5.09 6.95 8.70
Bond debt Wbd_os_z/Y 0.36 0.59 0.65 0.57 0.40 -1.24 -3.04 -4.69 -6.28 -7.86
    Percent
Capital intensity fKn/fX -0.17 -0.34 -0.57 -0.74 -0.85 -0.97 -0.93 -0.94 -0.96 -0.94
Labour intensity hq/fX -0.71 -0.87 -1.00 -1.08 -1.11 -1.06 -1.03 -1.02 -1.02 -1.02
User cost uim -0.48 -0.63 -0.76 -0.86 -0.94 -1.12 -1.14 -1.12 -1.07 -1.02
Wage lna -0.40 -0.75 -1.07 -1.34 -1.54 -1.91 -1.86 -1.73 -1.59 -1.43
Consumption price pcp -0.47 -0.65 -0.80 -0.93 -1.05 -1.37 -1.47 -1.49 -1.46 -1.41
Terms of trade bpe -0.34 -0.45 -0.53 -0.61 -0.67 -0.81 -0.83 -0.81 -0.77 -0.73
    Percentage-point
Consumption ratio bcp 0.02 -0.06 -0.04 0.04 0.11 0.12 -0.02 -0.09 -0.09 -0.08
Wage share byw -0.16 -0.30 -0.43 -0.50 -0.52 -0.42 -0.32 -0.26 -0.21 -0.18

(See details)

 

In this case all five factor inputs are made more efficient. Higher efficiency of factors means that factor inputs can be reduced, consequently investment and employment fall in the short term. The fall, particularly in machinery investment, reduces imports and depreciation, which increases gross operating surplus. As factors efficiency increases prices fall and net exports increase without relying on change in wages. Higher net exports increase production and employment. This offsets the initial fall in employment created by the increase in labor efficiency.

 

The initial fall in employment pushes wages and prices downward. This improves competitiveness and induce exports to rise even more. As in the previous experiment, the combined effect of higher efficiency and lower wages means that the short-term decrease in factor utilization disappears relatively quickly and the initial negative impact on employment is crowded out in year 5. In the long term, capital intensity and labor intensity fall by approximately 1 percent, excluding the housing sector. The 1 percent higher efficiency of material inputs implies a drop in the import content of demand, and the higher content of domestic value added increases the real wage in equilibrium. Consequently, the real wage rate increases by 2 percent in the long run in this experiment, while the real wage rate drops marginally in experiment 12 where only labor efficiency is increased.

 

Private consumption increases in the long run, due to the permanent increase in real wages and real disposable income, which is stimulated as the higher productivity increases the real income of transfer recipients. The public budget improves in the long term. The experiment can be seen as a permanent supply shock that lifts the output produced by the employed labor, which is unaffected in the long term.

 

Figure 14. The effect of a permanent 1 percent increase in labor and capital efficiency

 

fig_14_1_zoom38fig_14_2_zoom38

 

 

fig_14_3_zoom38fig_14_4_zoom38

 

 

fig_14_5_zoom38fig_14_6_zoom38

 

 

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