Weak labour productivity growth in the retail sector, caused by over-regulation and failure to keep pace with innovation at US rivals such as Wal-Mart, is a big weakness of the eurozone economy, according to the European Central Bank.
Restrictive regulation of opening hours and land use meant retailers in the 12 eurozone countries trailed US rivals in the adoption of new technologies and management methods, the ECB said in a report. As a result, retail prices had not fallen as much as they have in the US.
The report's authors say that the retail sector is an important part of the services sector where employment and economic activity are increasingly concentrated in terms of market structure. This sector has been a force driving productivity in the US, while its productivity growth decreased in Europe in the last decade. Regulation of retail trade plays a major role in explaining the productivity shortfall in Europe relative to the UK.
There was an overall positive impact of easing the opening hours and store size regulation on the sector’s performance and efficiency in OECD countries.
Otmar Issing, chief economist of the Frankfurt-based central bank, said trends in the retail sector were symptomatic of developments in the services sector, in which upward price pressure was more pronounced than in other sectors in the economies of the eurozone.
"In the context of aggregate inflation trends, the service sector plays a major role," Issing said, noting that it had long overtaken manufacturing in importance and now accounted for 70 per cent of eurozone jobs and "value added" economic output.
Issing said that the revised version of the controversial services directive proposed by the European Commission, was "a step in the right direction", although more could have been done to boost competition and, as a result, labour productivity.
The report, which was produced by experts from national central banks, is critical of measures to protect traditional shopkeepers against large rivals. Studies of France, Spain and Italy lead the ECB to say that job cuts happen anyway and prices rise faster.
The ECB report says one explanation for differences in retail sector labour productivity is the much larger average size of US shops.
The report says that gains in price flexibility brought about by increased competition are likely to be of a permanent nature. Overall, a higher level of competition in the services sector would tend to support more efficient and flexible services markets, facilitate adjustment processes and increase the resilience of the euro area to economic shocks.
The main results of the fact-finding exercise are summarised as follows in the report:
– From 1980 to 2002 the share of services in employment and in value added in the euro area increased by about 16 and 13 percentage points, respectively, to reach close to 70% of total employment and nominal value added in 2002. As pointed out in the literature, the increasing importance of this sector in the euro area economy is mainly being driven by the following factors: a higher demand for services related to higher income levels, an increased participation of women in the labour market partly associated with a shift from household to services activities, a process of market liberalisation and globalisation in some services industries and, in the first part of this period, the increasing role of the public sector in the economy. This secular trend is likely to continue.
– Labour productivity growth in the services sector as a whole in the euro area and in the majority of the euro area countries decreased in the 1990s relative to the 1980s, and even more when compared with the United States.
– Labour productivity growth across the euro area services industries appears to be characterised by a high degree of diversity. Over the last two decades, some services industries (such as post and telecommunications and financial intermediation) experienced a relatively strong productivity performance. Some other services sectors (such as hotels and restaurants, real estate, renting and business activities, and community, social and personal services) exhibited rather weak or even negative labour productivity growth.
– More specifically, in the wholesale and retail trade sector the increase in labour productivity was much smaller in the euro area than in the United States, the United Kingdom and some Scandinavian countries (Denmark, Sweden), both in the 1980s and in the 1990s. The gap between the euro area and the United States has widened considerably since the 1990s. By contrast, labour productivity growth in transport and storage and communication in the euro area was higher than in the United States (both in the 1980s and the 1990s) and this gap widened in the 1996-2003 period.
– Turning to price developments, value added price changes for total services and for the majority of services industries decreased in the 1980s and 1990s in the euro area. In particular, the value added price changes in post and telecommunications recorded a sharp fall over time in the majority of euro area countries.
– The services component had a weight of 41% in the euro area Harmonised Index of Consumer Prices (HICP) in 2005. In addition, the level of services inflation is on average higher than aggregate HICP inflation. At a country level, the difference between services inflation and non-energy industrial goods inflation is positively correlated with the aggregate inflation differential of a country vis-à-vis the euro area, suggesting that services inflation is one important factor behind aggregate inflation differentials in EMU.
– Additional insights into price-setting behaviour in the euro area services sector stem from the empirical studies conducted within the Eurosystem IPN. The services sector was consistently found to be the most rigid sector in the economy in terms of price setting across all countries considered. To some extent, this could be due to its cost structure, given the heavy weight of wages, which tend to be more rigid than some other costs. However, it could also be the result of limited competition in the services sector, as the IPN provided some evidence of a positive relationship between the degree of competition and the frequency of price adjustment. Enhancing competition in services markets could therefore reduce price rigidities in the services sector.
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