Positioning Denmark January 2006
Fading productivity performance hosting
adverse perspectives to long term growth
Positioning Denmark Pages 2 of 9
Curtailing productivity performance with diminishing competition in non-tradable businesses
Opportunity for durable income growth depends on the supply and productivity performance of a country’s work force. More precisely, while it remains familiar that output per work hour alters with innovation of new technologies - also investments into labor saving structures and machinery, returns from work place re-organization and higher educational attainment when matched with profitable earning opportunity in industry - contribute to enhance production and incomes created per employed and their number of work hours.
In this fashion, the Danish economy demonstrated dramatic restructuring beginning from early 1990 as steepening participation rates in work force combined with performance reduction to output created per hour worked in both private and public businesses. Same period additionally characterized by external and, in part as a consequence, internal adjustments to national saving balances resulting from structural current account surpluses with origin in ongoing adjustment to government’s debt levels abroad.
With reduction to external debts and, as an implication, enlargening maneuver room to public spending, declining external vulnerability resulted while resource mobilization in accommodation of future population ageing incurred from declining government debt service.
Highlighted by GDP growth averaging 2.6 percent per annum during 1990s, medium term growth trends nevertheless dramatically reduced from early 1990s as income growth leveled at a an annual average of 0.8 percent during the 2000-04 period. With investment expenditure responding to past decade’s growing tax pressure and moderate expansion to
private consumption spending, hourly productivity performance softened as well from an average of 2.7 percent first half of 1990s to a mere annual average of 1.2 percent first four years of present decade. In this fashion, deteriorating productivity growth in major employment areas comprising low skill wholesale, retail sales, accommodation and food places coupling with modest productivity advancements in public service – low skill labor intensive service
business exhibited a total decline from 1.7 percent 1990-95, and 0.5 percent 1995-00 to 0.0 percent average annual growth during 2000-04. Also manufacturing industry surfaced - albeit at moderate pace - with softening productivity growth same period as output per work hour, in part attributable to declining capacity utilization, stabilized from an average of 2.7 percent during 1990-95 – and 1.8 percent 1995-2000 - to 2.0 percent 2000-04. Owing to decline to productivity growth in agriculture – reducing from an average of eleven percent first half of
1990s - and 5.3 percent second half of 1990s - to a modest 3.7 percent 200-04 – also farm
business responded to altering economic conditions.
On this background and despite productivity advances made in transport and communication industry from ownership reform, economy wide productivity – estimated to
result from combined delayed deepening of public sector reform, advancing labor costs, and deteriorating competition in non-tradable industry - per man hour worked exhibited decline of unprecedented proportion since 1990.
With the imperative in mind of evident upper bounds to future work force participation rates – policy measures have, as a consequence, become increasingly urgent. With low investment shares contributing to national saving surpluses - and public saving rates surfacing as adequate to accommodate anticipated future spending needs - risks now emerge from declining productivity performance as perhaps largest vulnerability to preservation of the Danish welfare state despite growing dependency rates and rising resource claims to public benefit entitlements.
Positioning Denmark Pages 3 of 9
Enhancing public service – albeit at increasing costs to taxpayers
Productivity advances in public services
Source: Danish Statistical Department October 2005.
Beginning from this decade, productivity growth exhibited dramatic decline at central and local government. With productivity growth in health care hovering at an approximate 1-1 1/2 percent before declining to less than 0.5 percent in 2004 – declining from an excess of two
percent mid-of -1990s to near zero past year in education - and curtailing from 1 1/2 percent toward end of previous decade to minus one in public administration in 2004 - declining output performance in civil service altered profoundly in public service since commencement of decade.
While restructuring industry contributed to declining employment rates
Positioning Denmark Pages 4 of 9
Number employed by industry105(2002=100)