uctivity cost of this structural employment expansion may have amounted to Вѕ of a percent; the QUEST model simulations would put the productivity cost somewhat higher at 1 ВЅ per cent. Roughly translated into year-on-year figures using a mid-point between the VAR and QUEST estimates, this implies a reduction in annual productivity growth of around two tenths of a percentage point, equivalent to some 20% of the observed total productivity growth slowdown, which could be attributed to positive structural shocks in the labour market.
Graph 5: Cumulated euro area employment shock 1995 Q1 to 2003 Q 4
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A further interesting result of the VAR model relates to the question of the structural versus temporary nature of the productivity growth slowdown. Based on the underlying assumptions on the short, medium and long term impact of the various shocks, the VAR model attributes most of the decline in productivity to a structural trend decline in productivity growth. As can be seen from Graph 6, the autonomous shock to productivity explains a decline in the level of productivity of almost 5%, which would translate into an annual average productivity growth rate effect of the order of -0.6 percentage points. This is fully consistent with the growth accounting result given earlier of a decline in TFP of the order of a ВЅ a percentage point, with TFP considered to be a reflection of the structural component of the productivity trend.
Graph 6 also indicates that the autonomous productivity shock is unable to explain the increase in employment. Therefore, it is necessary to look separately at both shocks in order to give a complete picture of both the employment and productivity developments. However, concerning productivity, the overall conclusion from the analysis suggests that the decline in productivity growth is to a large extent structural in nature.
Graph 6: Cumulated euro area productivity shock 1995 Q1 to 2003 Q 4
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The empirical results presented above are quantitatively broadly in line with other available evidence on structural labour market improvements as indicated by a trend increase in participation and a reduction in structural unemployment. Moreover, relating the productivity effect to real wage moderation also suggests that the estimated impact on short-run productivity developments is of a reasonable order of magnitude. A stylised number for real wage moderation in the past 10 years or so would put the average annual reduction in real efficiency wages at slightly less than ВЅ a per cent. Thus, back-of the envelope calculations would suggest that real wage moderation could, on average, have reduced annual actual labour productivity growth relative to its balanced steady-state rate by about two tenths of a percentage point, which is well within the range derived from the VAR and QUEST model approaches. Further corroborating evidence stems from growth regressions sugge...
