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Buttonwood - Working hard for the money

There are more explanations than solutions for the productivity slowdown

Jun 4th 2016

ECONOMIC growth stems from two main sources: putting more people to work or

enabling workers to operate more efficiently (ie, better productivity). With

the workforce in many developed economies likely to stagnate or decline in the

next two decades as the baby-boomer generation retires, a lot is riding on

improvements in productivity.

So the recent progress of productivity in developed economies is cause for

severe disappointment. As the chart shows, growth is well below its level in

the late 20th century; the brief surge that was seen in places like America and

Canada at the time of the dotcom boom has also dissipated. A combination of

productivity growth of 1% or so and a stagnant workforce implies very sluggish

GDP growth.

A new paper* from the OECD tries to understand this puzzling slowdown in

productivity. It cites a number of possible explanations. There is the

progress is over thesis, for example: that modern advances in information

technology are nothing like as revolutionary as the spread of electricity or

the car. Another possibility is the shift from a manufacturing to a services

economy, where many workers may be less productive (and their jobs hard to

automate). And then there is the question of mismeasurement: some activities,

such as free internet-search engines, may not show up in GDP statistics;

productivity in service industries is hard to measure.

The role of technology lies at the heart of the puzzle. There were clearly

gains in the late 1990s and early 2000s, as the internet reduced transaction

costs and allowed companies to track their sales and inventories in real time.

There may of course be further gains to come, as companies adopt such

technologies as 3D printing or driverless vehicles.

However, most countries have seen a slowdown in technology investment (as a

proportion of GDP) since the dotcom boom. Even with interest rates at record

lows, it would seem there are fewer attractive high-tech projects around.

It may not just have been technology that caused America s productivity surge

in 1996-2004. Another possible factor is the spread of global value chains

business networks linking suppliers in many countries. Companies that want to

be part of a global value chain must be as efficient as possible; otherwise

competitors will overtake them. Global trade expanded rapidly in the late 1990s

and early 2000s as value chains were formed. But since the financial crisis

trade growth has been even more sluggish than GDP growth. This may be slowing

the development of value chains, and thus productivity.

A further factor may be a slower rate of new business formation. In the medium

term, you would expect new businesses to be more efficient than the old ones

they replace. But according to the latest data (2012-13), new firms account for

a much smaller share of companies in most countries than before the crisis.

Another factor is the mismatch between the skills of the workforce and the

needs of industry. In the wake of the recession of 2008-09, many workers were

forced to take lower-paying jobs. A survey conducted in 2013 found that more

than 20% of workers in rich countries thought they were overqualified for their

job (in England and Japan it was over 30%). The ready availability of workers

may also have persuaded firms to hire more staff, rather than making capital

investments.

At the same time, however, employers also complain of skill shortages. Perhaps

Western education systems are not turning out the sort of graduates modern

businesses are looking for. Perhaps governments need to encourage more training

in the workplace.

The OECD thinks these fundamental factors are more plausible explanations of

the slowdown than mismeasurement, especially as the decline is both

long-lasting and has affected emerging, as well as developed, economies.

Slowing productivity is one of the biggest problems facing rich countries. But

it is remarkable how little it features in public debate. Rather than figure

out how to make domestic production more efficient, politicians like Donald

Trump focus on keeping out goods and people from abroad. When governments do

try to improve productivity (such as the reforms to the labour market the

French government is pursuing) they face huge resistance. That suggests the

problem is not going to go away.