1. THE FUTURE OF
PRODUCTIVITY
Peterson Institute for International
Economics, Washington D.C.,
9 July 2015
Catherine L. Mann
OECD Chief Economist
… productivity isn't everything, but in the long
run it is almost everything.
Paul Krugman, 1994
Launch of the book: Adalet McGowan, M., D. Andrews, C.
Criscuolo and G. Nicoletti (2015), The Future of Productivity
OECD, Paris.
2. • Productivity: Why does it matter?
– Potential growth
– Labour productivity/Income per capita
• Productivity: What is wrong?
– Broken diffusion machine
– Misallocated resources, esp. skills
• Policies to revive productivity growth
Road Map
2
3. A peek at policy channels
Framework Policies, Demand Conditions and..
3
Productivity
growth
Skills
Mismatch
Innovation
and Diffusion
Wages and
Income
Distribution
Investment
KBC
4. Productivity is about:
Working smarter, not working harder
More output by better combining inputs, via:
new ideas
technological innovations
new business models
more efficient resource allocation.
Productivity crucial for potential growth
Productivity:
What is it, Why it Matters
5. 5
Potential Growth:
Who cares? What’s wrong? Promises, Promises
Source: June 2015 OECD Economic Outlook database.
Contributions to average annual percentage change of potential GDP per capita
6. Labour productivity (drives income/capita)
slowed even before the crisis…why?
Labour productivity growth since 1990
GDP per hour worked (China and India refer to GDP per worker)
7. Slowing investment in KBC
7
Investment in Knowledge Based Capital
Annual average growth
9. Since the crisis, sluggish investment
Business investment in different cycles
Cyclical peak in OECD real business fixed investment=100
(date of peak indicated)
9
80
90
100
110
120
130
140
150
80
90
100
110
120
130
140
150
t 2 4 6 8 10 12 14 16 18 20 22 24 26 28
t=1973Q4 t=1981Q4
t=2000Q3 t=2008Q1
Quarters since the peak
10. Prospects going forward?
10
Economic odd couple Robert Gordon, left, and Joel Mokyr encapsulate the debate on the future of innovation. ROB HART
FOR THE WALL STREET JOURNAL “”Economists Debate: Has All the Important Stuff Already Been Invented? By
Timothy Aeppel, June 15, 2014 10:38 p.m. ET
12. Problem is not innovation, it’s diffusion
Solid growth at the global productivity frontier but spillovers disappointed
Labour productivity; index 2001=0
12
“Frontier firms” corresponds to the average labour productivity of the 100 globally most productive firms in each
2-digit sector. “Non-frontier firms” is the average of all other firms. “All firms” is the sector total. The average
annual growth rate is shown in parentheses.
Manufacturing Sector Services Sector
0.0
0.1
0.2
0.3
0.4
0.5
2001 2002 2003 2004 2005 2006 2007 2008 2009
Frontierfirms
(3.5% per annum) All firms
(1.7% per annum)
Non-frontier firms
(0.5% per annum)
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
2001 2002 2003 2004 2005 2006 2007 2008 2009
Frontierfirms
(5.0% per annum)
All firms
(0.3% per annum)
Non-frontier firms
(-0.1% per annum)
13. Thinking about diffusion:
global frontier to national frontier to laggards
Global
frontier
National
Frontier
Laggards
A stylised depiction of how productivity
spreads matter for policy
14. Structural policies shape diffusion
Estimated frontier spillover (% pa) associated with a 2% point increase in MFP
growth at the global productivity frontier
Global connections Reallocation Knowledge-Based Capital
14
15. Global frontier to national frontier:
different countries, different issues
How much higher would be overall manufacturing sector labour productivity if national
frontier (NF) firms were as productive and large as global frontier (GF) firms?
NF firms in Italy have productivity levels
close to the GF but they are relatively small
15
NF firms in US have productivity levels 10%
lower than the GF but they are relatively big
19. • Higher and more efficient public
investment in basic research.
– Role for international co-operation?
• Enabling experimentation of firms with
new technologies and business models.
– Reduce barriers to firm entry and exit to
enable high productivity firms to grow and low
productivity firms to exit.
Keep the innovation engine running
19
20. Keep the innovation engine running
20
Est. frontier spillover (% p.a.)
associated with 2% point increase
in MFP growth at the frontier
Average across selected OECD countries
Index 1992=100
21. • Pro-competition reforms to product
markets, especially in services, to
maximise benefits of GVC participation.
• Closer collaboration between firms and
universities.
• A level playing field that does not favour
incumbents over entrants.
Revive the diffusion machine
21
22. Revive the diffusion machine
Estimated frontier spillover (% p.a.) associated with a 2% point increase in MFP growth at
the global productivity frontier
22
23. • Policies that promote efficient firm exit:
– Bankruptcy legislation that does not excessively penalise
business failure.
• Policies that make labour mobility easier:
– Housing market policies (e.g. low transaction costs affecting
buying and selling of dwellings) that facilitate residential
mobility.
– Employment protection legislation that does not impose too
heavy or unpredictable costs on hiring and firing.
• But also policies to help workers adapt to technological
change and cushion the costs of reallocation:
– Promotion of adult and lifelong learning.
– Well-designed social safety nets.
– Portable health and pension benefits.
Reallocate scarce resources to the most
productive firms
23
24. Reallocate resources to most productive
firms and support worker transition
The probability of skill mismatch and public policies
24
Entry and Exit Labour mobility Education
26. Future growth depends on productivity
Framework policies are the key
Contribution to growth in GDP per capita, 2000-2060 (annual average)
27. • OECD (2015), “The Future of Productivity”. OECD, Paris
• Adalet McGowan, M. and D. Andrews (2015a), “Labour Market Mismatch and
Labour Productivity: Evidence from PIAAC Data”, OECD Economics
Department Working Papers, No. 1209.
• Adalet McGowan, M. and D. Andrews (2015b), “Skill Mismatch and Public Policy
in OECD Countries”, OECD Economics Department Working Papers, No. 1210.
• Andrews, D., C. Criscuolo and P. Gal (2015), “Frontier Firms, Technology
Diffusion and Public Policy: Micro Evidence from OECD Countries”, OECD
Mimeo, forthcoming.
• Calvino, F., C. Criscuolo and C. Menon (2015), “Cross-country Evidence of
Start-Up Dynamics”, OECD Science, Technology and Industry Working Paper.
• Criscuolo, C., P. Gal and C. Menon (2014), “The Dynamics of Employment
Growth: New Evidence from 18 Countries”, OECD Science, Technology and
Industry Policy Papers, No. 14.
• Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From
the Global Productivity Frontier: Industry Level Evidence”, OECD Economics
Department Working Papers, No. 1238.
The following reports detail the results:
27
Editor's Notes
As a result of structural problems potential output growth has slowed, especially in Italy.
Declining capital per worker, employment rate and labour efficiency are the major cause of the slow down in potential output growth, which is close to zero today.
To raise potential output growth the government will need to push forward its comprehensive plan of structural reforms, which will lead to higher sustainable and more inclusive growth.
The government is implementing the Jobs Act. This is a major reform drastically improve the functioning of the Italian labour market by decreasing duality, lowering costs for dismissal and strengthening the unemployment benefit system
More need to be done to enhance the educational system, promote investment and innovation and the efficiency of the public administration.
Productivity growth slowed in many OECD countries even before the crisis, concerns of a structural slowing in productivity growth.
Notes: Growth rates for the period ranges are the annual averages. Country groupings are aggregated using GDP-PPP weights. Europe-5 includes: Austria, Belgium, Luxembourg, the Netherlands and Switzerland; Nordics includes: Denmark, Finland, Iceland, Norway and Sweden; Southern Europe includes: Greece, Portugal and Spain; and Latin America includes: Brazil, Chile and Mexico. Labour productivity data for China and India refer to GDP per worker.
Source: OECD calculations based on the Conference Board Total Economy Database.
Notes: Sourced from Corrado et al. (2012) … KBC includs R&D, firm specific skills, organizational know-how, databases, design, and various type of intellectual property.
Notes: Start-up rates (defined as the fraction of firms which are from 0 to 2 years old among all firms) averaged across three-year periods for the manufacturing, construction, and non-financial business services sectors.
Source: Criscuolo, Gal and Menon (2014).
Notes: Gross investment, PPP weights, data are for OECD countries for which the breakdown of investment is available.
These figures are robust to using different measures of productivity (MFP), following a fixed group of frontier firms over time and excluding firms that are part of a MNC.
We also see a similar pattern where the global frontier pulls away when we use industry level data
Widespread heterogeneity: very high MFP and very low MFP firms coincide within narrowly-defined industries.
Adoption lags for new technologies across countries have fallen, but long-run penetration rates once technologies are adopted have diverged (Comin & Mestieri, 2013).
MFP growth of laggard firms is more closely related to productivity developments at the national frontier (NF), as opposed to the global frontier (GF).
New GF technologies do not immediately diffuse to all firms. They are first adopted by NF firms, and only diffuse to laggards once they are adapted to national circumstances.
Thus, the distribution of aggregate productivity in countries matters. Having NF firms that are close to the GF is vital for productivity performance.
[As per slide]
Notes:
The chart shows how the sensitivity of MFP growth to changes in the frontier leader growth varies with different levels of structural variables. The diamond refers to the estimated frontier spillover effect associated with a 2% MFP growth at the frontier around the average level of the policy. The label “Minimum” (Maximum) indicates the country with the lowest (highest) value for the given structural indicator in a given reference year.
For example, countries that trade intensively with the frontier (Canada) would realise 0.35 percentage points higher productivity growth per annum than a country with fewer linkages (Austria).
Besides supporting diffusion of productivity enhancements at the frontier, efficient resource allocation has important direct effects on productivity growth.
The larger are the more productive firms, the greater the extent to which their good performance gets reflected in overall economic growth. Unfortunately, the most productive and dynamic firms do not always grow to optimal scale.
In some economies, the most advanced firms have productivity levels close to the global frontier, but they are under-sized.
Overall manufacturing sector labour productivity would be around 20% higher in Italy but little changed in the United States if national frontier firms were as productive and large as the global frontier benchmark.
More specifically, in Italy, approximately three-quarters of this productivity gap can be explained by the fact that national frontier firms – while actually quite productive in global terms – are relatively small compared to those at the global frontier
Notes: The productivity (size) gap shows how much higher manufacturing productivity would be relative to baseline if the national frontier firms (NF) were as productive (large) as the global frontier (GF) benchmark. The cross term shows the impact on aggregate productivity of simultaneously closing the productivity and size gaps. The estimates are constructed by taking the difference between counterfactual labour productivity and actual labour productivity. The counterfactual gaps are estimated by replacing the labour productivity (employment) of the top 10 NF firms with the labour productivity (employment) of the 10th most globally productive firm in each two-digit sector.
In fact, it is crucial that young firms are able either to grow rapidly or exit. If they linger too long, resources are wasted. Against this background, cross-country differences in the age and size profile of firms are particularly significant. For instance, only 22% of small firms in Finland – which account for 41% of total employment – can be classified as “young” (i.e. less than 5 years old), against more than 50% in the United States and other countries. The number at the top of the chart is share of employment.
Sweden and Italy same survival pattern but very different growth patthern.
Finland NZ, relatively low survival rates, but NZ firms do not grow… question is why. Issue of small countries, remote location, barriers to global expansion?
Firms at the global frontier are more likely to be part of a MNE group than other firms. This suggests that global co-ordination policy measures might be relevant
Firms at the global frontier are more likely to be part of a MNE group than other firms. This suggests that global co-ordination policy measures might be relevant
Closer collaboration between firms and universities would benefit esp. small firms who have limited access to the global knowledge frontier, research labs, etc.
A level playing field that does not favour incumbents over entrants applies to many policy measures. For example, the design of R&D tax credits is important to make them accessible to young and new firms. Many young innovative firms typically make losses in the early years of an R&D project and thus will not benefit from the program unless it contains provisions for immediate cash refunds for R&D expenditure or allows such firms to carry associated losses forward to deduct against future tax burdens.
High rates of skill mismatch emerge as a key constraint on the growth of innovative firms.
On average across countries, roughly one-quarter of workers report a mismatch between their existing skills and those required for their job – i.e. they are either over or under-skilled – but this figure is closer to one-third in Italy, Spain and the Czech Republic.
Over-skilling is generally more common than under-skilling, with the average likelihood of being over-skilled roughly two and a half times greater than that of being under-skilled.
Higher skill mismatch is associated with lower labour productivity performance, with over-skilling being particularly costly.
When firms draw from a scarce and fixed pool of skilled labour, trapping highly-skilled labour in relatively low productivity firms can make it more difficult for more productive firms to attract the workers necessary for their expansion. This is what tends to occur in industries with a high share of over-skilled workers.
New OECD evidence shows that better use of human talent in countries where skill mismatch is very high, such as Italy and Spain, could boost the level of labour productivity by around 10%. This could close about one-fifth of the gap in labour productivity between Italy and the United States (or Sweden).
Reducing skill mismatch – particularly over-skilling – can also promote inclusive growth since a better matching of skills to jobs makes workers more productive, implying scope for higher wages, and reduces the risk that under-utilised skills will quickly depreciate.
Data Notes:
The measure of skill mismatch is based on a combination of subjective (questions asked to survey participants) and objective criteria (based on skill scores).
We estimate a cross-country regression of labour productivity indicators on skill mismatch indicators, controlling for country and industry fixed effects and other relevant drivers of productivity (e.g. market concentration).
Gains to LP are calculated as the difference between the actual allocative efficiency and a counterfactual allocative efficiency based on lowering the skill mismatch in each country to the best practice level of mismatch observed in each industry.
Source: Based on OECD, Survey of Adult Skills (PIAAC), cross-sectional data for 2011-12. Firm level productivity indicators (from ORBIS) aggregated to the industry level.
OECD long-run projections from “Policy Challenges for the Next 50 Years”