THE FUTURE OF PRODUCTIVITY

Peterson Institute for International Economics, Washington D.C., 9 July 2015

Catherine L. MannOECD 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.

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• 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

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A peek at policy channelsFramework Policies, Demand Conditions and..

Productivity growth

Skills Mismatch

Innovation and Diffusion

Wages and Income

Distribution

Investment KBC

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

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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

Labour productivity (drives income/capita) slowed even before the crisis…why?

Labour productivity growth since 1990GDP per hour worked (China and India refer to GDP per worker)

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Slowing investment in KBC

Investment in Knowledge Based CapitalAnnual average growth

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Declining business dynamism

Share of start-up firms in total Per cent; average over the periods

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Since the crisis, sluggish investment

Business investment in different cyclesCyclical peak in OECD real business fixed investment=100

(date of peak indicated)

t 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 2880

90

100

110

120

130

140

150

80

90

100

110

120

130

140

150

t=1973Q4 t=1981Q4 t=2000Q3

t=2008Q1

Quarters since the peak

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Prospects going forward?

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

THE BREAKDOWN OF THE DIFFUSION MACHINE

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Problem is not innovation, it’s diffusionSolid growth at the global productivity frontier but spillovers disappointed

Labour productivity; index 2001=0

“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

Frontier firms(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

Frontier firms(5.0% per annum)

All firms(0.3% per annum)

Non-frontier firms(-0.1% per annum)

Thinking about diffusion: global frontier to national frontier to laggards

Global frontie

r

National

Frontier

Laggards

A stylised depiction of how productivity spreads matter for policy

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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

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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

NF firms in US have productivity levels 10% lower than the GF but they are relatively big

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Frontier to average firmOld & small are less productive, trap resources

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Survival, growth, or Outthe dynamics of creative destruction

Firm growth and survival rates, by firm age

POLICIES TO REVIVE PRODUCTIVITY GROWTH

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• 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

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Keep the innovation engine running

Est. frontier spillover (% p.a.) associated with 2% point increase

in MFP growth at the frontier

Average across selected OECD countriesIndex 1992=100

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• 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

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Revive the diffusion machine

Estimated frontier spillover (% p.a.) associated with a 2% point increase in MFP growth at the global productivity frontier

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• 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

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Reallocate resources to most productive firms and support worker transition

The probability of skill mismatch and public policies

Entry and Exit Labour mobility Education

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Reducing skill mismatch is a win-win:raises productivity and wages too

Future growth depends on productivityFramework policies are the keyContribution to growth in GDP per capita, 2000-2060 (annual average)

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• 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: