1. THE FUTURE OF
PRODUCTIVITY
Dan Andrews (Economics Department)
Chiara Criscuolo (Directorate for Science, Technology
and Innovation)
Global Dialogue on The Future of Productivity
Mexico City | 6 July 2015
… productivity isn't everything, but in the long run it is
almost everything.
Paul Krugman, 1994

2. 1. Productivity: now more than ever
2. Thinking about productivity: frontier firms and
diffusion
3. Productivity in a globalised world: structural
and policy drivers
4. Policy messages and issues for future
research
Outline
2

3. PRODUCTIVITY: NOW MORE
THAN EVER
3

4. Differences in GDP per capita
Percentage differences compared with the upper half of OECD countries, 2013
Source: OECD Going for Growth Database. 4

5. Differences in GDP per capita mostly
reflect labour productivity gaps
Percentage differences compared with the upper half of OECD countries, 2013
Source: OECD Going for Growth Database. 5

6. Productivity growth slowed across
the OECD, even before the crisis
Labour productivity growth since 1990
GDP per hour worked (China and India refer to GDP per worker)
Source: OECD calculations based on the Conference Board Total Economy Database.
6

7. • Techno-pessimists vs techno-optimists
• Given this uncertainty, we need to find sources of
productivity growth where there is large and sure
scope for improvement.
• Two key sources of growth emerge:
1. Effective diffusion
2. Efficient resource allocation, especially skills.
• Effective diffusion and skill matching can be good
for both growth and equity.
Productivity will be the key driver of
future growth but uncertain outlook
7

8. THINKING ABOUT
PRODUCTIVITY: FRONTIER
FIRMS AND DIFFUSION
8

9. 1. Widespread heterogeneity: very high MFP and very low
MFP firms coincide within narrowly-defined industries.
2. Adoption lags for new technologies across countries
have fallen, but long-run penetration rates once
technologies are adopted have diverged (Comin &
Mestieri, 2013).
3. 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 diffuse to laggards
once they are adapted to national circumstances.
Analytical framework
9

10. Analytical framework
Global
frontier
National
Frontier
Laggards
Adoption
convergence
Penetration
divergence
10

11. The breakdown of the diffusion
machine
Solid growth at the global productivity frontier but spillovers disappointed
Labour productivity; index 2001=0
Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy:
micro evidence from OECD countries”, OECD Mimeo. 11

12. The globally most productive firms
– who are they?
Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy:
micro evidence from OECD countries”, OECD Mimeo.
Mean Std Dev Number Mean Std Dev Number
Productivity 4.06 1.04 3657 2.51 0.91 294031 1.5 ***
Employment 309 3770 3657 229 4119 294031 81
Capital stock (€m) 31 355 3657 19 343 294031 12 **
Turnover (€m) 250 1731 3657 59 754 294031 191 ***
Profit rate 0.57 0.33 3657 0.13 6.33 294031 0.45 ***
Age 21.5 20.3 3657 23.2 18.6 294031 -1.7 ***
MNE status*
Probability 0.47 0.50 3450 0.28 0.45 310765 0.19 ***
Patenting status
Depreciated patent stock 3.71 45.15 3657 0.90 56.17 294031 2.8 ***
Multi Factor Productivity (Solow)
Selected OECD Countries, 2005 (unless otherwise noted)
Global Frontier Firms Non-Frontier Firms
Difference
in means
Mean firm characteristics: frontier firms and non-frontier firms
12

13. Firms at the global productivity
frontier have become older
Average age (years) of firms in the frontier and non-frontier groups
Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy:
micro evidence from OECD countries”, OECD Mimeo.
Manufacturing Services
Notes: Frontier is measured by the top 100 firms in each 2-digit industry and each year, based on Solow residual-based MFP.
15
20
25
30
Non-frontier Frontier
15
20
25
30
Non-frontier Frontier
13

14. … consistent the broader decline in
business dynamism
Declining start-up rates across OECD countries
Source: C. Criscuolo, P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18
Countries”, OECD Science, Technology and Industry Policy Papers, No. 14.
14

15. PRODUCTIVITY IN A
GLOBALISED WORLD:
STRUCTURAL & POLICY
DRIVERS
15

16. Three areas for policy:
1. Pushing out the global frontier
2. Reviving the diffusion machine
3. More efficient resource allocation,
especially skills.
Note: #2 partly depends on getting #3 right
How to revive productivity growth?
16

17. • 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.
Pushing the frontier: keep the
innovation engine running
17

18. Reviving the diffusion machine:
structural factors shape diffusion
Estimated frontier spillover (% pa) associated with a 2% point increase in
MFP growth at the global productivity frontier
Source: 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.
Globalisation Reallocation Knowledge-Based Capital
18

19. Services are the oil that greases the
wheels of globalisation
A: Value added share of domestic services in
gross exports has been rising
Upshot: an inefficient domestic services sector can erode the productivity
benefits of globalisation. Here, there is a big role for policy.
B: Resource misallocation in services
is a problem
Source: Panel A OECD TiVA Database. Panel B: Andrews, D. and F. Cingano (2014), “Public Policy and Resource
Allocation: Evidence from Firms in OECD Countries”, Economic Policy, 29(78), pp. 253-296.
19

20. Policies shape the diffusion of new
innovations from the global frontier
Estimated frontier spillover (% pa) associated with a 2% point increase in MFP
growth at the global productivity frontier
Source: 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.
Entry and Exit Innovation policies
20

21. Policies to facilitate the catch-up of
laggards to the national frontier
Impact of policy reforms on the MFP growth of laggard firms, 2005
Reducing PMR from high level in Greece to the OECD average
% difference between industries with high and low firm churning
Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy:
micro evidence from OECD countries”, OECD Mimeo.
21

22. Aggregate gains from diffusion is
magnified by efficient reallocation
Source: Andrews, Criscuolo and Gal (2015), “Frontier firms, technology diffusion and public policy: micro
evidence from OECD countries ” OECD Mimeo.
How much higher would overall manufacturing sector labour productivity
be if NF firms were as productive and large as GF firms?
NF firms in Italy have productivity levels
close to the GF but they are relatively small
22

23. … but up-scaling can be difficult
Post-entry growth - average size of young and old firms
Source: C. Criscuolo, P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18
Countries”, OECD Science, Technology and Industry Policy Papers, No. 14.
Manufacturing Services
0
10
20
30
40
50
60
70
80
Startups (0-2) Old (>10)
Employees
0
10
20
30
40
50
60
70
80
Startups (0-2) Old (>10)
Employees
23

24. Skill mismatch as a constraint on the
growth of innovative firms
Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity:
evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.
Skill mismatch, particularly over-skilling, is harmful for productivity because it
constrains the ability of innovative firms to attract skilled workers and grow.
24

25. Policies to support efficient
resource allocation
OECD research shows that efficient resource
allocation is promoted by:
 Low administrative burdens on start-up firms
 Less stringent employment protection legislation
 Bankruptcy legislation that does not excessively
penalise business failure
 Availability of seed and early stage financing
25

26. Reducing skill mismatch requires a
range of policies
The probability of skill mismatch and public policies
Source: Adalet McGowan, M and D. Andrews (2015), “Skill mismatch and public policy in OECD countries”
OECD Economics Department Working Paper, No. 1210.
Entry and Exit Labour mobility Education
26

27. POLICY MESSAGES
& ISSUES FOR FUTURE
RESEARCH
27

28. Framework policies
1. Pro-competition product market reforms, esp. in services
2. Exit matters: bankruptcy legislation that does not
excessively penalise failure
3. Policies that do not inhibit labour and residential mobility
4. Education & social policies to help workers adapt to
technological change and the costs of reallocation
Innovation policies
1. Public investment in basic research
2. Collaboration between firms and universities
3. R&D fiscal incentives and IPRs but design is crucial
Policies to revive productivity
growth
28

29. The crisis: cleansing or scaring?
The jury is still out…
Average employment growth across the firm MFP distribution
Deviation from 2002-10 average; selected European countries – business sector
Notes: Authors calculations based on production survey data from ESSLait. Unweighted average of 11 countries: AT, DE,
DK, FI, FR, IT, NO, NL, PO, SE, UK. A common (European) industrial structure is employed to aggregate industries.
But comparison with past
recessions is difficult
29

30. The crisis: most jobs were destroyed
by the downsizing of old incumbents
Contributions to aggregate net job creation by entrants, young/old exitors, and
young/old incumbents.
-8
-6
-4
-2
0
2
4
6
8
Contributiontoaggregatenetjobcreation
Young (entry) Young (exit) Young (incumbents)
Old (exits) Old (incumbents) Total
%
Source: C. Criscuolo, P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18
Countries”, OECD Science, Technology and Industry Policy Papers, No. 14. 30

31. New harmonized and representative data to study
the micro drivers of aggregate productivity.
– creative destruction process across countries and
its contribution to productivity growth;
– Within-sector productivity dispersion and efficient
allocation of resources.
New questions: link between productivity with
wage inequality and their trends
Develop better policy indicators:
– Bankruptcy legislation;
– IP systems.
New cross-country data sources
31

32. More information…
32
http://www.oecd.org/eco/the-future-of-productivity.htm