Calculation and Projection of the Productivity and Innovation Gaps of the German Federal States

Tasks

It is very likely that potential output growth of the German economy will halve in the upcoming years. One major reason is demographic change, which is causing the German population to age by a simultaneously observed decline in the labour force. The shrinkage in potential output growth will therefore lead to a deceleration in the growth of living standards, measured as real gross domestic product (GDP) per in-habitant. If the aim is to stop this deceleration, there is a need of a stronger increase in labour productivity in the future. This increase can be achieved by technological change. However, taking past increase in technological change as given, it is hard to imagine that high growth rates can be initiated in the future to compensate for the negative demographic effects on potential output growth. Looking only at Germany as a whole, however, masks significant heterogeneities among the German federal states as demographic trends vary tremendously between the sub-national entities. In the long term, these demographic differences could even jeopardise the convergence process between structurally weaker and more structurally strong regions. The aim of this project is to calculate potential output growth for each of the German federal states up to 2035 and to quantify the necessary productivity development and the technological change that would at least guarantee a target growth rate in living standards.

Methods

The basis for the calculation of potential output for the German federal states is a neoclassical production function with labour, capital and total factor productivity as inputs. Based on a standard Growth Accounting framework, the first part of the pro-ject presents the realised growth shares of each input factor for each German federal state’s real GDP growth. The second part of the project defines different scenarios and investigates the resulting potential output growth. The productivity gap is then calculated as the difference in growth rates of projected GDP per inhabitant and GDP per employee. Whenever it is intended to ensure a specific target growth rate of GDP per capita, the innovation gap is the growth rate in total factor productivity with which this target is reached.

Data and other Sources

Data on population (Federal Statistical Office and Statistical Agencies of the States)
Regional Accounts (Working Group Regional Accounts)