Decomposing Growth in France, Germany and the United Kingdom Using Growth Accounting and Production Function Approaches

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This paper uses Growth Accounting and Production Function Analysis to decompose the factors behind differences in growth between the UK, France and Germany between 1992 and 2005. Most of the growth differential between the United Kingdom, Germany and France since 1993 can be explained by structural factors. The United Kingdom's higher growth has originated essentially in the finance and business sector, which is ICT-intensive. Germany's weak growth reflects in large part the aftermath of the unification shock and a continued fall in the labour input. At the same time there has been a sharp slowdown in knowledge accumulation, which seems to have restrained labour productivity growth. After EMU, the performance of German manufacturing improved relative to both France and the United Kingdom, while capital deepening became less supportive to growth because of lower investment in infrastructures and dwellings. France's higher growth relative to Germany since 1999 comes essentially from the non-tradable sectors and from a higher labour input. This may be partly related to a more significant decline in the volatility of real interest rates.

Keywords: Growth accounting; Production function estimation

JEL classifications: 040; 057; E23

I. Introduction

In this paper we compare growth rates in France, Germany and the United Kingdom since the full implementation of the Common Market in 1993. Our objective is to understand why the performance of the three main EU economies, as plotted in figure 1, differed and in particular to help understand why German growth rates fell relative to those of the United Kingdom and France. Our work follows on from that of Metz, Riley and Weale (2004), who looked at the supply and demand factors underlying the performance of the same countries over a shorter period of time using aggregate data. We use growth accounting and production function analysis to decompose growth into the contributions of capital, labour and technical progress.

[FIGURE 1 OMITTED]

It is common to describe the productive capacity of an economy through the use of an aggregate production function, which describes the interaction between factor inputs, such as labour and capital, the state of technology, and any other factors that may affect the quality or efficiency of the production process. Growth may vary across countries because factor input growth differs over time and space. Labour supply depends on institutions, preferences and demographics, and its equilibrium will change when institutions, preferences and demographic structures change. Labour input has been falling in Germany and, as we will show, this is an important factor behind the growth differentials with France and especially the United Kingdom. Capital input growth may also differ over time either because investment growth changes or because the rate of depreciation of the existing capital stock changes.

With output [Y.sub.t] measured by real gross value-added, [K.sub.t] by the real gross capital stock, [L.sub.t] by the total number of hours worked, and [T.sub.t] representing a shift factor in the production function that captures technical progress and productive efficiency in all their forms, we may write the production function generally as

[Y.sub.t] = F([K.sub.t] [L.sub.t], [T.sub.t]) (1)

If we take the total differential this may be written as

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (2)

If we have perfect competition we can say that the share of output accruing to capital is [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] and the labour share is [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]; with constant returns [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]. Substituting this into (2) defining [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] we can rewrite this as (1)

d ln([Y.sub.t] = [[theta].sub.Kt]d ln([K.sub. …