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Norway: Selected Issues

Author(s):
International Monetary Fund. European Dept.
Published Date:
August 2014
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Productivity Growth in Norway1

Norway is a high-capacity economy which has performed well in the past and has been affected only mildly by the global financial crisis. However, productivity has slowed down, which coupled with high wage growth, has eroded competitiveness. The government established a Productivity Commission to propose solutions to this challenge. This paper suggests some areas for inquiry as well as ideas for developing a strategy and policy recommendations to improve competitiveness and growth in productivity.

A. Introduction

1. Labor productivity growth in Norway has slowed in the last decade. This trend is evident whether labor productivity is measured as value added per employee or per hour worked. Productivity in mainland Norway is moving roughly with peers. However, international comparisons using the total economy (i.e., including oil and gas) show a more unfavorable trend.

Gross Value Added Per Hour Worked

(Index 2005=100)

Sources: OECD and Fund staff calculations

Unit Labor Costs

(Index: 2000=100)

Sources: OECD and Fund staff calculations.

2. Low productivity and high wage growth have eroded competitiveness. Non-oil sector export shares have fallen due to both strong growth of unit labor costs (ULC) because of high wage growth and a decline in labor productivity. Wage costs have risen steadily and well above those in peer economies. This has led to low profitability in industries that are exposed to foreign trade and where productivity has not kept pace.

3. The government has established the Norwegian Productivity Commission in order to address these challenges and suggest reforms. The task of the Productivity Commission is to provide advice to the government on how to strengthen productivity growth. Specifically, the Productivity Commission is tasked to: (i) survey and analyze the weaker productivity growth since 2005; (ii) raise concrete proposals to strengthen productivity and growth in the Norwegian economy; (iii) present proposals on a current basis; (iv) undertake public benefit based analysis; and (v) draw on the latest international work. The work of the Productivity Commission will consist of two stages, where an introductory report will be presented in early 2015 and a main report a year later.

4. This chapter examines Norway’s productivity growth and competitiveness challenge. The next section examines the evidence of productivity, discussing the differences in measurement as well as trends for the Norwegian economy. Section C looks at productivity from a different angle by a specific grouping of industries. Section D presents some policy measures which could help boost productivity. The chapter concludes with section F.

B. Measuring Productivity in Norway

5. Productivity is defined as a ratio between a volume measure of output and a volume measure of input. Productivity can be defined relative to a single output such as labor, for example. It can also be defined relative to multiple outputs such as labor and capital. However, it has to be considered that the volume of inputs and outputs are measured imperfectly. In addition, productivity measurement uncertainty varies across sectors. It is easier to measure with standardized goods than with services. For this reason, value added is commonly used and is obtained by deflating gross output and intermediate consumption individually.

  • Labor productivity can be measured as output per worker or as output per hour worked. Even though the number of hours worked is more difficult to measure, it may be more appropriate for Norway because the number of hours worked per worker has changed over time and varies over the business cycle.

  • Total factor productivity (TFP) is an estimate of the increase in an output which cannot be attributed to an increase in labor and capital. TFP cannot be observed and is calculated by deducting the contribution of labor, capital and other inputs from output growth.

GVA per Hour Worked Norway

(Index 2000=100)

Sources: Statistics Norway and Fund staff calculations

6. While productivity growth in Norway has slowed, earnings have outpaced productivity, particularly wages deflated by the CPI. Real producer wages have more or less followed the path of productivity in mainland Norway but real consumer wages have outpaced this trend. In other words, the purchasing power of employees has improved without being followed by real producer wages. This is due to the positive terms of trade developments which Norway has enjoyed since 2000 becasue prices of export goods increased more than prices of import goods following the oil price increase.

Mainland Real Hourly Wages

(Index: 2005=100)

Sources: Statistics Norway and Fund staff calculations.

Norway Terms of Trade, 1990-2013

(US dollars)

Sources: IMF World Economic Outlook and Fund staff calculations.

C. Productivity Growth from Another Angle

7. The differences between the mainland and offshore economies complicate the assessment of productivity. 2 The oil and gas sector accounts for about 25 percent of 2012 GDP, but it employs very few people at salaries that are about twice those in the rest of the economy. Also, annual data on productivity aren’t that meaningful in the oil and gas sector because the timing of inputs and their related outputs are often separated by many years. Any meaningful analysis of productivity in Norway must therefore separate the offshore (oil and gas plus shipping and fisheries) and mainland (everything else) economies.

8. The oil and gas sector’s demand for mainland goods and services has a large and complicated set of effects on the mainland economy as well as its productivity and wages. The authorities have designed fiscal institutions to insulate the mainland economy and the budget from the oil and gas revenue through the fiscal rule and the sovereign wealth fund. This insulation has been mostly effective. However, the mainland economy has been strongly affected in recent years by demand for goods and services from the oil sector. Consequently, this has boosted mainland demand, increased wages, and created differential trends on wages shares and ULCs within the mainland economy between tradable and non-tradable sectors, and within the tradable sector.

9. The oil and gas sector has been providing a positive productivity and demand impulse to the mainland economy through technology transfer. Bjornland and Thorsrud (2013) conclude that the booming oil sector has had large and positive productivity spillovers on the mainland economy. Oil and gas sector demand has boosted investment, value added, employment and wages in most tradable and non-tradable sectors of mainland Norway. The sectors which have benefited the most are construction, business services, and real estate. The study further finds that windfall gains from oil revenue stimulate the economy as well, particularly if the increase in the oil price is driven by global demand. At the same time, oil price increase due to supply disruptions stimulates technology-intensive sectors as well as public spending but has small spillovers to the rest of the economy.

10. The demand from the oil and gas sectors has also had negative effects on parts of the mainland economy through labor demand and wage pressures. Wages were bid up across the economy to keep pace with the oil and gas sector, reinforced by Norway’s strong tradition of broadly similar wage settlements across the economy. This added cost pressures to the non-oil-and-gas sectors leading to lower profitability and slower growth or increased exit from those industries. The productivity and competitiveness challenges posed by the role of the oil and gas sector can best be seen by separating industries into exposed and sheltered (i.e., tradable and non-tradable) and further subdividing the exposed industries into: (i) resource-based industries; (ii) suppliers to the oil and gas sector; and (iii) footloose industries that are not closely tied to the Norwegian economy (Table 1).3

Table 1.Resource-Based, Footloose, and Oil and Gas Supply Industries
  • Resource-based industries

    • a. Petroleum extraction*

    • b. Fishing*

    • c. Forestry

    • d. Fish farming

    • e. Mining and quarrying

    • f. Food products, beverages and tobacco

    • g. Manufacture of wood and wood products, except furniture

    • h. Manufacture of paper and paper products

    • i. Basic metals

  • Suppliers to the petroleum industries:

    • a. Service activities incidental to oil and gas

    • b. Repair and installation of machinery and equipment

    • c. Building of ships, oil platforms and modules

    • d. Transport via pipelines*

  • Footloose:

    • a. Ocean transport*

    • b. Refined petroleum, chemical and pharmaceutical products

    • c. Machinery and other equipment

    • d. Textiles, wearing apparel, leather

    • e. Rubber, plastic and mineral products

    • f. Furniture and other manufacturing

Source: Statistics Norway, * indicates offshore industries
Source: Statistics Norway, * indicates offshore industries

11. Labor productivity and wages have increased most for the suppliers of the petroleum industries. Until the early 2000s, labor costs for all industries moved mostly in tandem. However, from 2000 to 2013, labor costs of suppliers to the petroleum industries increased 55 percent more than those of the sheltered industries. As these industries are quite profitable, they can absorb the rising labor costs.

Labor Cost per Hour Worked

(Index 2000=100, constant 2011 NOK)

Sources: Statistics Norway and Fund staff calculations

Gross Value Added per Hour Worked

(Index 2000=100, constant 2011 NOK)

Sources: Statistics Norway and Fund staff calculations.

12. When the oil and gas sector is excluded, the exposed mainland industries exhibit the strongest productivity growth. Specifically, labor productivity of the non-oil tradable sectors has consistently outpaced the oil and gas related tradable sector, to be followed by the non-tradable sector (sheltered industries). Considering that labor costs for all industries have mostly kept pace with the leading oil and gas sector, increasing productivity in the mainland exposed sectors is a necessary response to cost pressures and small profit margins.

Gross Value Added Per Hour Worked

(Index 200=100, constant 2011 NOK)

Sources: Statistics Norway and Fund staff calculations

Labor Cost per Hour Worked

(Index 2000=100, constant 2011 NOK)

Sources: Statistics Norway and Fund staff calculations.

Wage Shares

(Percent of labor costs + operation surplus)

Sources: Statistics Norway and Fund staff calculations.

13. The mainland exposed industries have had the highest productivity growth but also a steep increase in ULCs and declining profitability. As profit margins are squeezed, some firms and industries that cannot maintain productivity growth in line with wages are forced to exit. Conversely, the oil-related exposed industries have wage shares trending downward as these industries are quite profitable and they have been able to absorb the rising wage costs.

D. The Road to Increasing Productivity and Competitiveness

14. Competitiveness and business environment indicators provide some suggestions for increasing productivity back to its historical growth levels. The Norwegian economy has a very favorable business environment but further improvements could be made. The World Bank Doing Business Indicator (DBI) ranks Norway 9th out of 189 economies in 2014 and the Global Competitiveness Index (GCI) ranks the country 11th in terms of overall competitiveness. Furthermore, the Innovation Scoreboard published by the European Commission considers Norway a moderate innovator with its performance coming close to that of the innovation followers due to its strong performance in open, excellent and attractive research systems.4 However, Norway receives significantly lower grades in areas that would seem to matter most for supporting innovation and entrepreneurship. In particular, DBI ranks it only 53rd and 73rd on starting a business and getting credit, respectively.

15. Improvements in the education system could also help increase productivity. The dropout rate at the upper secondary level is high even though secondary school students’ PISA scores are around average.5. Incentives for students to undertake tertiary education in terms of the earning premium and better employment prospects are low compared to other countries. Also, only about 1 percent of employees in Norway aged 25-35 have a degree in Science, Technology, Engineering and Mathematics (STEM) fields and such graduates have about average starting salaries in contrast to other industries in Norway. This may indicate a mismatch between the demand for skills and their supply that undermines innovation and productivity. Incentivizing both universities and students to match fields of study that match the labor demand could help address this.

16. Some characteristics of the labor market may be imposing a barrier to productivity growth. The Work Environment Act stipulates that normal daily working time must not exceed nine hours over 24 hours and the weekly working time must not exceed 40 hours during seven days. Additional flexibility in the working times and scheduling would allow employers to adjust to fluctuating demand.

Figure 1.Competitiveness Indicators

17. Norway has a relatively large number of people taking early retirement through disability which constrains labor supply. The sickness leave and disability pension system provides incentives to people to leave the labor force early to a greater extent than in many other advanced economies. Reforming the sickness leave and disability pension systems to provide greater labor supply flexibility could increase output although not labor productivity growth.

Norway Population Structure, 2010

(Population inside and outside the labor force)

Sources: OECD and Fund staff calculations.

18. The choice of public investment projects does not always reflect the authorities’ own social and economic cost-benefit analysis. Many public investment projects have social and economic benefits that are below their costs, particularly in transportation, which is an obstacle to productivity growth. Welde et al (2013) find that high Norwegian construction costs make road projects in Sweden more profitable. Furthermore, the economic viability of projects in Norway does not seem to have an impact on the selection of projects included in the national transport plan. Of the projects reviewed in the study, only about a third of those in Norway were considered profitable. Therefore, it would be beneficial if projects are prioritized according to the net present value.

19. Agricultural policy is constraining productivity. OECD Producer Support Estimates (PSE) place support to farmers in Norway at 60 percent of gross farmer receipt over the period 2010-2012. This support is three times higher than the OECD and EU averages which are at 19 percent of gross farmer receipts 2012. As a result, Norway’s extremely high trade restrictions and subsidies are diverting private and public resources away from more productive sectors and raising the cost of living, particularly for lower-income groups.

Norway Innovation Union Scorecard, 2013

(Annual average growth)

Sources: European Commission Innovation Union Scorecard 2013 and Fund staff calculations.

E. Conclusion

20. The Norwegian economy can take some steps to boost its productivity growth and competitiveness. Scope for action exists along a number of dimensions. One avenue for Norway to achieve higher productivity growth and improve competitiveness is by improving the business environment. Human capital development and the education system can play a central role in boosting productivity growth. Furthermore, removing rigidities in the labor market, implementing cost-benefit analysis for selection of infrastructure projects, and updating agricultural policy could provide the right environment for raising productivity growth and improving competitiveness.

Box 1.Productivity Commissions

Australia leads the way with its productivity commission established in 1998. The Australia Productivity Commission (APC) is the government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed simply, is to help the government make better policies in the long term interest of the Australian community. The APC focuses on ways to achieve a more productive economy as this is the key to higher living standards. As an advisory body, its influence depends on the power of its arguments and the efficacy of its public processes.

The APC has four main output streams: (i) public inquiries and research studies requested by the government, (ii) performance monitoring and benchmarking and other services to government bodies, (iii) competitive neutrality complaints, and (iv) supporting research and annual reporting on productivity, industry assistance and regulation. As the APC is an advisory body, it does not administer government programs. Its contribution is centered on its independent advice and its core function is to conduct public inquiries on key policy or regulatory issues bearing on Australia’s economic performance and community wellbeing. The APC also undertakes a variety of research at the request of government and to support its annual reporting, performance monitoring and other responsibilities.

The New Zealand productivity commission is tailored after the APC and began functioning in April 2011 as an independent entity. The principal purpose of the Commission is to provide advice to the Government on improving productivity in a way that is directed to supporting the overall well-being of New Zealanders, having regard to a wide range of communities of interest and population groups in New Zealand society. In order to fulfill this purpose the commission does three main things: (i) undertake in-depth inquiries on topics referred to them by the Government (our core business); (ii) carry out productivity-related research that assists improvement in productivity over time, and (iii) promote understanding of productivity issues. There is no simple formula to improve productivity. Based on the experience of the New Zealand productivity commission, there are a few general practicalities for improving productivity: (i) respect for the law and property rights, (ii) effective governance arrangements, and (iii) an attractive business environment, including a high-quality low cost regulatory environment.

A large number of other factors identified by the New Zealand productivity commission also matter, such as:

  • the degree of openness and competition in markets, which is important to incentivize innovation, improve allocation of resources and achieve more dynamic performance;

  • investment and other strategic choices made by organizations (e.g. using new and smarter technology), which depend on the quality of governance and management;

  • the attitude and effort of employees toward ongoing training, finding business improvements and helping implement beneficial change;

  • the quality of education and the attitude of students toward the value of learning;

  • the quality of government decisions (at all levels), in setting policy and shaping regulatory environments, and deciding where public money is spent; and

  • the aspirations of individuals and families.

In late 2012, the government of Denmark also established a productivity commission. As the Danish government called for the establishment of a productivity commission with independent experts and specialist to analyze the productivity trends in Denmark and propose specific policies which will enhance productivity in the economy. According to its terms of reference the commission is responsible for:

  • Identify the reasons for the relatively weak productivity growth since the mid-1990s in Denmark. The commission shall benefit from existing knowledge and supplement with new analyses.

  • Identify the main drivers and barriers for productivity growth, including firms’ use of knowledge and education, as well as the allocation of these resources in the economy.

  • Clarify the link between business productivity, costs and competitiveness.

  • Make concrete recommendations to strengthen productivity in the private sector, including in the manufacturing, construction and service sectors.

  • Provide new knowledge about productivity in the public sector and make specific recommendations on how to strengthen it, including the municipalities, regions and the state. The aim is that resources will be used more effectively in the public sector e.g. through modernization, digitalization and better organization.

  • Assess the impact of the above recommendations and incorporate relevant international experience

References

    Australian Government Productivity Commission2013Annual report 2012-2013Productivity Commission Annual report Series 2013http://www.pc.gov.au/_data/assets/pdf_file/0008/128438/annual-report-2012-13.pdf

    Council of the European Union2013Employment and Social Developments in Europe 2012European CommissionJanuary2013

    Eurofound2013Third European Company Survey: First FindingsEuropean Foundation for the Improvement of Living and Working Conditions2013http://www.eurofound.europa.eu/publications/htmlfiles/ef1386.htm

    European Commission2013Innovation Union Scoreboard 2013European Union 2013http://ec.europa.eu/enterprise/policies/innovation/files/ius-2013_en.pdf

    IFC2013Doing Business 2014 Economy Profile: FinlandWorld Bank Group Corporate Flagshiphttp://www.doingbusiness.org/data/exploreeconomies/finland/

    New Zealand Productivity Commission2013Our Performance 1 April 2012 to 30 June 2013Annual ReportNew Zealand Productivity Commission

    New Zealand Productivity Commission2013Productivity by the Numbers: The New Zealand ExperienceNew Zealand Productivity Commission Research PaperSeptember2013http://www.productivity.govt.nz/sites/default/files/Commission%20Research%20Paper%20-%20Conway%20Meehan%20Productivity%20by%20the%20Numbers%20-%20Productivity%20by%20the%20numbers%20(final).pdf

    Norges Bank2009Productivity Growth in Norway 1948-2008Economic Bulletin 2/2009http://www.norges-bank.no/Upload/77504/EN/Productivity%20growth.pdf

    EikaTorbjornB.Strom and A.Cappelen.2013Competitive Industries in NorwayStatistics Norway 2013 report 58/2013http://www.ssb.no/nasjonalregnskap-og-konjunkturer/artikler-og-publikasjoner/_attachment/151642?_ts=142b2b05d60

    OECD2012OECD Economic Surveys: Norway 2012OECD PublishingFebruary

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    OECD2013Agricultural Policy Monitoring and Evaluation 2013OECD PublishingSeptember

    PavittK.1984Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory,Research PolicyElsevier Vol. 13(6) pp. 34373.

    WeldeMorten. J.EliassonJ.OdeckM.Borjesson2013Planning, Analytic Tools and the Use of Cost Benefit Analysis in the Transport Sector in Norway and SwedenConcept Report No 33Norwegian University of Science and technologyhttp://www.concept.ntnu.no/Publikasjoner/Rapportserie/33_webutgave_komplett_engelsk_A_4_korr4.pdf

    World Economic Forum2013Global Competitiveness Index: Country/ Economy Profile Norwayhttp://www3.weforum.org/docs/CSI/2012-13/Norway.pdf

Prepared by Borislava Mircheva (EUR).

The “offshore” economy in Norwegian official data is dominated by oil and gas production, but it also includes the shipping industry and fishing (but not fish farming). Offshore data are often used as a proxy for the oil and gas sector and the term “offshore” is sometimes used as shorthand for the oil and gas sector.

Eika et al. (2013), Statistics Norway report 58/2013

Based on the following categories of Norway Innovation Union Scorecard: (i) Non-EU doctorate students, (ii) Scientific publications amount top 10 percent most cited, and (iii) International scientific co-publications

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