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Director Tyson Brown, National Geographic Society Author National Geographic Society Production Managers Gina Borgia, National Geographic Society Jeanna Sullivan, National Geographic Society Program Specialists Sarah Appleton, National Geographic Society, National Geographic Society Margot Willis, National Geographic Society otherThis paper addresses the long-term slowdown in labour productivity for a panel of 25 countries. First, we look at productivity shifts and trends based on structural break tests and modern filtering techniques. The productivity slowdown is evident in almost all countries we investigate. Second, we deepen the analysis by decomposing labour productivity growth. Third, we use dynamic models to test for Granger causality in the trends and find that there is strong evidence that a slow GDP growth trend causes the subsequent productivity trend. We conclude that the productivity slowdown is a global phenomenon and should therefore be tackled at the international level. Productivity growth has always been a key indicator for the possible long-term prosperity and growth opportunities of societies. Changing trends in labour productivity growth have been factors for stabilising or destabilising distributional conflicts between capital and labour: as long as capitalism produced higher incomes for the majority of working people around the globe – as in the decades after the Second World War – the legitimacy of income and wealth inequality was a less pressing social question due to the diminished distributional conflict between capital and labour. For long periods, capitalism seemed to deliver what it promised, i.e. to make everyone better off. However, if, on the contrary, labour productivity growth should ever slow down in comparison to capital growth, as it has from the 1970s and onwards, social tensions stemming from grossly unequal income distribution would be sure to rise.1 A look at labour productivity trends in recent decades reveals that – with the exception of a short productivity miracle in some countries in the second half of the 1990s and early 2000s – the overall trend in measured productivity growth is declining. After the financial crisis, the productivity growth trends of most countries stabilised closely to a growth rate of slightly above zero. This can be easily exemplified through some simple econometrics for several prominent OECD countries, as shown in Figure 1. Figure 1 |
Excluded series | χ2 statistic | P-value |
---|---|---|
Common component of productivity growth | 2.82 | 0.42 |
Common component of GDP growth | 9.69 | 0.02 |
Source: Authors’ calculations based on data from The Conference Board Total Economy Database: Output, Labor and Productivity, 1950-2015.
The null hypothesis of “non-causality” cannot be rejected for the direction running from productivity to GDP, but we would reject “non-causality” at the usual significance levels for the direction running from GDP to productivity growth. The common downward trend in productivity growth is therefore likely to be “caused” (or influenced) by the downward trend in GDP growth – and not vice versa.
What about country differences? To explore that, we used a cluster analysis of productivity growth to shed light on the issue of how much countries differ with respect to their productivity growth over time.12
Regarding productivity growth, we find three aspects worth mentioning. First, differences in general are very small, as all countries have many similarities. With the exception of Turkey and Cyprus – each with strong catching-up growth effects over the sample periods – all countries are very similar. Identified subgroups to a large extent confirm the findings of the well-known “varieties of capitalism” approach: Anglo-Saxon countries are clustered together, Scandinavian countries are close to each other and continental European countries form two groups – one consisting of catching-up (periphery) countries and one of the established (core) countries of the EU. Strikingly, however, the differences between groups are very small. A quite similar picture appears for productivity growth trends.
To sum up the investigative part, all countries face a downward trend in productivity, and the common trend follows a similar decline in the GDP growth trend. There are, however, country groups which are different with respect to the speed of the decline in productivity growth due to catch-up growth effects at the beginning of the sample. The differences across countries, however, are small.
Remedies
Our study shows that there is a long-run joint downward trend in productivity and growth, with the causality of this trend originating from growth to productivity. Underlying causes could be manifold – ranging from hysteresis effects on labour and capital markets13 to slow innovation dynamics in stagnating economies.14 The remedies, however, are straightforward. We need stronger demand to lift growth and create room for creative destruction.
First, strong collective action is needed to lift growth rates in Europe and all other regions in the world. This in turn calls for a collaborative approach that could make the overall impact more effective. An example was the collective stimulus programme agreed to at the G20 summit in Pittsburgh in 2009, which was essential to deal with the global financial and economic crisis. If all developed countries could agree to pull in the same direction for fostering an overall growth agenda, perhaps the current and real risk of protectionism could be contained. However, if each country attempts to pursue its own separate agenda, the best response for any single country is to proceed with protectionism, stifling the possibility of spillover growth effects in the global economy. The current agenda pushed by Donald Trump is exactly this, as he has promised to put America first. In a global interconnected world, this could become self-defeating.
Second, a new age of protectionism and “beggar-thy-neighbour” policies could further harm growth with still more negative consequences. Even if globalisation has not worked to improve everyone’s living standards, a process of de-globalisation would have devastating economic effects.
Third, global governance needs to be strengthened. In particular, the globally dominant economic countries should accept their responsibility to strengthen the structure of global governance in order to support inclusive global growth. This would require strengthening and further developing the international institutions as effective global governance bodies.
Fourth, growth policies have to strike a balance between demand- and supply-side measures. A one-sided demand pull policy of higher public deficit spending would be incomplete and would only have short-term impacts if the supply-side measures were not simultaneously implemented. The structural impediments constricting the growth potential of the global economy could then not be released to ignite a sustainable long-term recovery of productivity growth.
Fifth, supply-side growth-enhancing measures often require careful and painstaking regulatory reforms. This takes time, and strong policy action is necessary to push them through the legal process and implement them effectively. Often this cumbersome process fails, resulting in negative impacts on the sustainability of growth.
Sixth, investments in infrastructure where they are urgently needed may be one crucial element for a supply-side policy. But they are just one element and by no means a silver bullet towards a long-term higher productivity growth path. In particular, a narrow definition of public infrastructure that concentrates on roads and bridges is highly insufficient.
Seventh, to realise the potential of higher growth, multiple bottlenecks in the production and innovation system must be addressed. This includes bureaucratic inertia and a lack of innovation-friendly regulatory frameworks, among other things. Deregulation is not the solution. There will always be a need to balance the effects of innovation between the winners and losers of innovation to strike a fair deal. This can only be accomplished by active innovation management. Free markets, due to unbalanced market power, tend to produce unfair results where the powerful dominate the weaker market participants. In the short run this might work, but it will ultimately backfire, as the rising resistance against such outcomes has become visible in the populist movements against globalisation.
Eighth, growth has to balance ecological and environmental constraints. Without taking care of these exogenous limits for sustainable growth, the implicit costs such as climate change, pollution, exhaustion of natural resources, etc. will become visible sooner rather than later. These effects are costly to correct – as China is now discovering after a long period of high growth that did not pay much attention to environmental concerns.
Ninth, the financial system has to be adjusted to effectively support long-term growth driven by innovation. Access to financing should be given to those with entrepreneurial spirits, such as start-ups, to realise their business plans. Innovators often get stranded due to lack of access to financing. However, effective risk management is needed in this area, which is still in short supply.
Tenth, the heterogeneity still prevailing among countries gives ample room for country-specific growth policies at the national level. Naturally, a common international framework needs to be complemented by domestic policy to address the specific shortcomings in each individual country. There is no common standard one can take off the shelf and implement.
Conclusion
All this makes it understandable why productivity growth has slowed down. Omissions over the past decades have reduced the growth potential of the developed economies step-by-step. Short-term upticks due to general purpose technologies like the internet economy (particularly in the US) run into rising obstacles such as internet security issues and inefficiencies arising from information overload. These combine to prevent customers from making optimal use of the potential positive productivity growth associated with them, thus limiting our ability to use this technology to access a higher growth path.
Summing up, we believe that there is a chance to engineer a turnaround in productivity growth, but a cumbersome road must be travelled in order to return to a higher growth path. One-sided approaches tend to result in failure in the end. One has to face these challenges to reform the whole production and innovation system.
- 1 N. Roubini: Globalization’s Political Fault Lines, Project Syndicate, 4 July 2016; and J.E. Stiglitz: From Brexit to the Future, Project Syndicate, 6 July 2016.
- 2 R.J. Gordon: Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, NBER WP 18315, National Bureau of Economic Research, August 2012.
- 3 L. Karabarbounis, B. Neimann: The Global Decline of the Labour Share, NBER WP 19136, National Bureau of Economic Research, June 2013.
- 4 C.M. Reinhart, K.S. Rogoff: This Time is Different – Eight Centuries of Financial Folly, Princeton 2010, Princeton University Press; International Monetary Fund: Fiscal Monitor, April 2016; E. Stockhammer, R. Wildauer: Debt-driven growth? Wealth, distribution and demand in OECD countries, in: Cambridge Journal of Economics, Vol. 40, No. 6, November 2015.
- 5 R.J. Gordon: Exploding productivity growth: context, causes, and implications, Brookings Papers on Economic Activity 2003, No. 2, pp. 207-298.
- 6 Our sample consists of 25 industrialised countries: Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Malta, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, Canada, United States, Japan and South Korea. The sample is based on annual data for labour productivity. Growth rates are available for the years 1951 to 2015.
- 7 See J. Bai, P. Perron: Computation and Analysis of Multiple Structural Change Models, in: Journal of Applied Econometrics, Vol. 6, 2003, pp. 72-78. For more information on the methods used throughout this article, please see G. Erber: Labor Productivity Slowdown in the Developed Economies, DEP (Socioeconomics) Discussion Papers Macroeconomics and Finance Series, No. 201604, 2016.
- 8 The sample is trimmed at the upper and lower 15% in the test setting.
- 9 The filtered series are obtained by smoothing out the business cycle component of the labour productivity series using the Kalman filter. The resulting series are the time varying constants of the regression as in R.J. Gordon: Exploding ..., op. cit.
- 10 For details refer to G. Erber et al., op. cit.
- 11 H.Y. Toda, T. Yamamoto: Statistical inference in vector autoregressions with possibly integrated processes, in: Journal of Econometrics, Vol. 66, Nos. 1-2, 1995, pp. 225-250.
- 12 We used Ward linkages as a clustering method and the squared Euclidean L2 as a distance measure. We excluded South Korea and Malta as outliers. More information is available on request.
- 13 E. Klär, U. Fritsche: Mehr Beschäftigung durch weitere Arbeitsmarktreformen?, in: Wirtschaftsdienst, Vol. 88, No. 7, 2008, pp. 451-460; E. Klär: Kapitalakkumulation, Gesamtnachfrage, Arbeitsmarktinstitutionen und Beschäftigung in pfadabhängigen Volkswirtschaften. Neue neoklassische Synthese und postkeynesianische Kritik, Marburg 2013, Metropolis.
- 14 P. Aghion, P. Howitt: Appropriate Growth Policy: A Unifying Framework, in: Journal of the European Economic Association, Vol. 4, Nos. 2-3, 2006, pp. 269-314.