By Christophe André, Peter Gal and Álvaro Pereira
It is well known that productivity ultimately drives living standards. In the long run, all that matters is productivity. However, productivity growth has been on a declining trend across the OECD for decades (Fernald, Inklaar and Ruzic, 2024; Goldin et al, 2024). Labour productivity – measured by GDP per hours worked or per employee – has been slowing from nearly 2% annual growth to around 0.8% per year over the last decade. This slowdown was driven by lower trend multi-factor productivity growth and, since the global financial crisis, weaker capital accumulation (Figure 1). In a new paper (André and Gal, 2024), we provide an update on the existing macro- and firm-level evidence and on the role of public policies.[1]
Figure 1. MFP and capital accumulation have both contributed to the slowdown in trend per capita potential growth
Decomposition of OECD potential GDP per capita growth (annual change, in %)
Note: All variables are smoothed except capital stock per worker. For more details, see the source.
Source: André and Gal (2024) based on the OECD Economic Outlook 113 Database.
The long-term declining productivity growth trend since the 1970’s was interrupted by a roughly decade-long rebound starting in the mid-90s, associated with the diffusion of information and telecommunication technologies (ICTs) in the United States and other countries. Looking at the micro level, firms at the technological frontier have continued to perform more strongly than other firms since the 2000s (Andrews, Criscuolo and Gal, 2016), but the rate of frontier growth also seems to have slowed in the past decade or so. High uncertainty, financial disturbances, low investment, and weak business dynamism may have all played a role in slowing OECD productivity growth to historical lows.
As OECD economies face structural headwinds, including ageing, diminishing gains from education and high debt levels, a productivity revival appears more necessary than ever. But can it be achieved? A debate has been going on for over a decade on the ability of new technologies to boost productivity, with sceptics such as Gordon (2016) considering that recent inventions are unlikely to foster the same kind of growth as did electricity and the internal combustion engine, against those who believe that digital technologies can boost productivity, provided the right complementary investments are in place (e.g., Brynjolfsson, Rock and Syverson, 2021; Mokyr, 2013). In particular, recent OECD research shows that Artificial Intelligence will provide a significant boost to productivity (e.g. Filippucci et al., 2024; Filippucci, Gal and Schief, 2024).
Indeed, productivity is not only about technology. OECD research has shown that the broader economic environment is key for promoting innovation, diffusion and turning it into productivity benefits (OECD, 2015). Our paper builds on that framework by exploring how incentives and capabilities affect firms at the technology frontier and below, as well as the reallocation of resources across the economy (Table 1).
Table 1. The scope of policies to raise productivity through shaping incentives and capabilities: A stylised framework
Note: MFP stands for multifactor productivity. See more details in the source.
Sources: André and Gal (2024), building on and extending OECD (2015).
Competition is key among incentives: it encourages firms at the technological frontier to innovate and other companies to adopt modern technologies and business practices. Therefore, the rising market concentration in the United States and to a lesser extent in Europe, along with rising markups and the long-term decline in business dynamism is worrying.[2] Moreover, the fragmentation of international trade, due to geopolitical tensions and other barriers, is eroding the productivity benefits from global competition, and also holds back knowledge spillovers across borders in value chains. Regulatory and trade policies should aim to revert or mitigate these tendencies.
Innovation can also be incentivised through intellectual property regimes provided they strike the right balance between protecting innovation and preserving market competition. Fiscal incentives and public procurement also matter, and can be used in a directed way to serve other policy goals such as greening the economy.
The allocation of resources (such as labour and capital) across firms also plays a key role for aggregate productivity. Flexible labour markets, well designed active labour market policies, and better access to housing are essential for labour reallocation, but can be hampered by excessive use of non-compete and non-poaching clauses as well as burdensome licensing procedures. Efficient insolvency regimes can promote entrepreneurship, by lowering the cost of failure, and facilitate corporate restructuring and the reallocation of resources towards more productive uses.
Crucially, providing the right incentives needs to be complemented with measures to improve capabilities along various dimensions. First, promoting basic research is key to advance the knowledge frontier. Second, good quality infrastructure and other measures for domestic and international integration help creating innovation networks to diffuse knowledge. Third, attracting venture capital and measures addressing the difficulties of financing intangibles could allow start-ups to flourish. Finally, human capital can be developed through higher quality education systems, promoting and enabling lifelong learning, spreading good management practices and fostering a better use of skills through matching of workers to jobs.
In sum, while the impact of new technology on economic growth remains highly uncertain, governments should pull all the available policy levers to strengthen incentives and build capabilities to ensure their economic benefits are maximised and contribute to a revival of productivity growth, and hence boosting living standards.
References
Andre, C. and P. Gal (2024), “Reviving productivity growth: A review of policies”, OECD Economic Policy Papers, No. 1822, https://www.oecd.org/en/publications/reviving-productivity-growth_61244acd-en.html.
Andrews, D., C. Criscuolo and P. Gal (2016), “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy”, OECD Productivity Working Papers, No. 5., https://www.oecd.org/en/publications/the-best-versus-the-rest_63629cc9-en.html.
Brynjolfsson, E., D. Rock and C. Syverson (2021), “The Productivity J-Curve: How Intangibles Complement General Purpose Technologies”, American Economic Journal: Macroeconomics, Vol. 13/1, pp. 333-372, https://doi.org/10.1257/mac.20180386.
Fernald, J., Inklaar, R. and Ruzic, D. (2024), The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends?. Review of Income and Wealth. https://doi.org/10.1111/roiw.12690.
Filippucci, F., et al. (2024), “The impact of Artificial Intelligence on productivity, distribution and growth: Key mechanisms, initial evidence and policy challenges”, OECD Artificial Intelligence Papers, No. 15, OECD Publishing, Paris, https://www.oecd.org/en/publications/the-impact-of-artificial-intelligence-on-productivity-distribution-and-growth_8d900037-en.html.
Filippucci, F., P. Gal and M. Schief (2024), “Miracle or Myth: Assessing the macroeconomic productivity gains from Artificial Intelligence”, OECD, forthcoming.
Goldin, I., P. Koutroumpis, F. Lafond, and J. Winkler (2024), “Why Is Productivity Slowing Down?” Journal of Economic Literature, 62 (1): 196-268, https://doi.org/10.1257/jel.20221543.Mokyr, J. (2013), Is technological progress a thing of the past?, https://cepr.org/voxeu/columns/technological-progress-thing-past.
Gordon, R. (2016), “Perspectives on “The Rise and Fall of American Growth””, American Economic Review, Vol. 106/5, pp. 72-76, https://doi.org/10.1257/aer.p20161126.
OECD (2015), The Future of Productivity, OECD Publishing, Paris, https://www.oecd.org/en/publications/the-future-of-productivity_9789264248533-en.html.
OECD/APO (2022), Identifying the Main Drivers of Productivity Growth: A Literature Review, OECD Publishing, Paris, https://www.oecd.org/en/publications/2022/11/identifying-the-main-drivers-of-productivity-growth_4268ebf8.html.
[1] For a recent complementary overview of the literature on the structural drivers of productivity with a stronger focus on measurement, see OECD/APO, 2022.
[2] Even though a resurgence in US business creations since the COVID-19 pandemic offers a glimmer of hope.