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The future of productivity Peterson Institute for International Economics Washington D.C. 9 July 2015

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  1. 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. 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. 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. 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. 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. 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. 7. Slowing investment in KBC 7 Investment in Knowledge Based Capital Annual average growth
  8. 8. Declining business dynamism Share of start-up firms in total Per cent; average over the periods 8
  9. 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. 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. 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. 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. 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. 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
  16. 16. Frontier to average firm Old & small are less productive, trap resources 16
  17. 17. 17 Survival, growth, or Out the dynamics of creative destruction Firm growth and survival rates, by firm age
  19. 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. 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. 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. 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. 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. 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
  25. 25. Reducing skill mismatch is a win-win: raises productivity and wages too 25
  26. 26. Future growth depends on productivity Framework policies are the key Contribution to growth in GDP per capita, 2000-2060 (annual average)
  27. 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