OECD attempts to solve productivity puzzle

27 May 16

The OECD has attempted to find answers to the so-called ‘productivity puzzle’ in a report that suggests the problem could be structural rather than cyclical.

 

The think-tank’s Compendium of Productivity indicators rules out mismeasurement as explaining away decline in productivity, which it shows began well before the 2008 financial crisis despite the increased participation of firms in value chains, rising education and technological innovations.

Productivity is the central driver of long-term economic growth and rising living conditions, and its unexplained, global slowdown has long troubled and puzzled the international community.

While productivity growth remains below pre-crisis rates in many countries, the OECD said evidence points to the downward trend beginning well before 2008.

Rates began declining in the early 2000s in Canada, the UK and the US and even earlier, in the 1970s, in France, Germany, Italy and Japan.

With the downturn lasting so long, and a growing body of evidence suggesting mismeasurement is not the underlying cause, concerns are emerging this may reflect a structural, rather than cyclical, slowdown, the OECD said.

A number of factors could be behind this, including skill mismatches, sluggish investment and declining business dynamism, particularly post crisis.

The report shows that investment in information and communication technology, for example, has fallen as a share of GDP in recent years in many countries, but in particular in Germany, Sweden, Japan and the US.

Business dynamism, measured by start-up rates and the pace with which new firms displace less productive companies, has also slowed significantly in many OECD economies.

Slow productivity growth has hit wages, and the OECD warned this may exacerbate income and wealth inequalities, trapping many workers in low-productivity activities with high job insecurity, and thus creating a “vicious circle”.

The OECD underscored the need to promote productivity growth and share its gains by exploiting new and emerging technologies, investing in human capital to meet the needs of 21st century production, and fostering innovation, in particular through young firms.

This, it said, “is as important today as it has ever been, to create a virtuous cycle that tackles both growth and inclusion gaps”. 

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