Question

What is the productivity slowdown? What might be causing it and why?

Answer 1

Productivity measures the rate at which inputs are turned into outputs, and is widely seen as the main long-run determinant of per capita output growth and living standards. As a result, the slowdown in measured productivity growth over the recent decades has raised serious concerns, both in academic circles but also among business and policy decision makers

The U.S. economy is currently experiencing a prolonged productivity slowdown, comparable to another slowdown during in the 1970s. Economists have debated the causes for these slowdowns: The reasons range from the 1970s oil price shock to the 2007-08 financial crisis.

Understanding what drives labour productivity growth is not a simple task. Growth accounting – trying to explain the growth in output per hour by the growth in other productive inputs - generally distinguishes between three different sources: labour quality, capital per worker, and total factor productivity (TFP). TFP is mainly associated at the firm level with management practices and the adoption of new technologies. At a more aggregated level, reallocation plays an important role, with market competition gradually replacing inefficient firms with more productive ones in a process that Schumpeter identified as being essential for progress. The functioning of markets is itself constrained by a set of institutions governing factor markets, international trade, and technology diffusion. Country and period specific factors, such as the 2008 financial crisis, also play important roles and make it hard to provide general, one-size-fits-all explanations

Causes of productivity slowdown are as follows:

First, Second, evidence suggests that productivity growth is still very strong, possibly stronger than ever, but confined to “frontier firms”. These tend to be younger, more innovative and profitable. They also vastly outperform the laggards, whose poor performance brings down the average. Here the productivity slowdown is thought to be due not to lack of innovation, but rather to a lack of diffusion from the frontier to the rest of the economy.

This stems partly from the growth of monopolies and oligopolies in many industries. They encourage the “financialisation” of corporate activity at the expense of productive investment, particularly in R&D. Another factor is the uneven quality of management, which can inhibit enterprise “absorptive capacity”, or the take-up of new ideas and business practices, even in a competitive environment.

Finally, there is the view that whether or not there has been a transformation of productivity performance as a result of technological change, it may not be reflected in the statistics due to measurement shortcomings. For example, the role of the internet in changing the way we communicate, assemble data and deliver services is simply not captured by traditional measures.

Most economists accept that “what we measure affects what we do; and if our measurements are flawed, decisions may be distorted”. But some go further, arguing that “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being. And measures of well-being should be put in a context of sustainability”.

today’s innovations do not compare in scale or impact with the breakthroughs of the 1990s let alone the wave of earlier transformations bringing urban sanitation, electricity, the telephone, television and commercial flight: “so it’s the lack of really profound economy-wide impacting innovation in the past few years that’s been the problem.”