14. Productivity - labor and capital efficiency

Here, the efficiency of capital and labor is increased and the demand for both factors falls. 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 labor and capital.(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 2010-Dkr.
Priv. consumption fCp 534 1343 2139 3088 3826 4461 3494 3415 4189 5172
Pub. consumption fCo -41 -65 -85 -104 -123 -208 -288 -363 -434 -502
Investment fI -3238 -3367 -294 1724 2891 4215 2785 1836 1788 2075
Export fE 3073 5224 7451 9691 11884 20616 24699 25815 26049 26549
Import fM -1550 -1085 780 2195 3150 5406 5857 6124 6521 6939
GDP fY 1820 4095 8152 11812 14832 22797 23751 23390 23805 25013
    1000 Persons
Employment Q -22.46 -20.77 -16.90 -12.71 -8.75 3.65 5.35 3.34 1.47 0.39
Unemployment Ul 12.14 10.39 8.35 6.23 4.25 -1.89 -2.68 -1.66 -0.73 -0.19
    Percent of GDP
Pub. budget balance Tfn_o/Y -0.16 -0.16 -0.02 0.12 0.24 0.57 0.60 0.58 0.59 0.64
Priv. saving surplus Tfn_hc/Y 0.26 0.30 0.12 -0.03 -0.14 -0.26 -0.09 0.02 0.04 0.03
Balance of payments Enl/Y 0.11 0.14 0.10 0.09 0.11 0.32 0.51 0.60 0.64 0.67
Foreign receivables Wnnb_e/Y 0.53 0.85 0.99 1.08 1.18 2.06 3.75 5.78 7.75 9.56
Bond debt Wbd_os_z/Y 0.34 0.51 0.51 0.38 0.16 -1.90 -4.18 -6.03 -7.57 -8.99
    Percent
Capital intensity fKn/fX -0.14 -0.33 -0.56 -0.73 -0.85 -1.01 -0.89 -0.81 -0.77 -0.75
Labour intensity hq/fX -0.92 -0.99 -1.07 -1.11 -1.13 -1.07 -1.01 -1.00 -1.01 -1.01
User cost uim -0.48 -0.63 -0.76 -0.88 -0.98 -1.20 -1.13 -1.02 -0.94 -0.90
Wage lna -0.42 -0.84 -1.18 -1.44 -1.64 -1.81 -1.41 -1.04 -0.84 -0.76
Consumption price pcp -0.46 -0.66 -0.82 -0.96 -1.08 -1.35 -1.32 -1.23 -1.15 -1.11
Terms of trade bpe -0.33 -0.45 -0.56 -0.64 -0.71 -0.84 -0.78 -0.70 -0.64 -0.61
    Percentage-point
Consumption ratio bcp -0.07 -0.08 -0.05 0.02 0.07 0.12 0.00 -0.09 -0.09 -0.07
Wage share byw -0.34 -0.46 -0.56 -0.61 -0.62 -0.46 -0.25 -0.15 -0.12 -0.12

(See details)

 

Higher efficiency of labor and capital means that both 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 reversed quickly. In the long term, capital intensity and labor intensity fall by approximately 1 percent, excluding the housing sector.

 

There is a small positive impact on private consumption in the long run, due to the positive impact on 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.

 

Figure 14. The effect of a permanent 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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