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- 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
- 8. Declining business dynamism Share of start-up firms in total Per cent; average over the periods 8
- 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
- 11. THE BREAKDOWN OF THE DIFFUSION MACHINE
- 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
- 16. Frontier to average firm Old & small are less productive, trap resources 16
- 17. 17 Survival, growth, or Out the dynamics of creative destruction Firm growth and survival rates, by firm age
- 18. POLICIES TO REVIVE PRODUCTIVITY GROWTH
- 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
- 25. Reducing skill mismatch is a win-win: raises productivity and wages too 25
- 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”