The future of productivity

Productivity growth slowed in many OECD countries even before the crisis, which amplified the phenomenon. The slowdown in knowledge-based capital accumulation and decline in business start-ups over this period also raises concerns of a structural slowing in productivity growth. The economic forces shaping productivity developments can be better understood by focusing on three types of firms: the globally most productive (i.e. global frontier firms), the most advanced firms nationally and laggard firms. • Productivity growth at the global frontier has remained relatively robust in the 21st century, despite the slowdown in average productivity growth. For example, labour productivity at the global frontier increased at an average annual rate of 3½ per cent in the manufacturing sector over the 2000s, compared to an average growth in labour productivity of just ½ per cent for nonfrontier firms, and this gap is even more pronounced in the services sector. However, firms at the global frontier have become older, which may foreshadow a slowdown in the arrival of radical innovations and productivity growth. • The rising gap in productivity growth between the global frontier and other firms raises questions about: i) the ability of the most advanced firms nationally to adopt new technologies and knowledge developed at the global frontier; ii) diffusion of existing technologies and knowledge from national frontier firms to laggards; and iii) the rise of tacit knowledge as a source of competitive advantage for global frontier firms. The aggregate gains from the diffusion of global frontier technologies and knowledge will be magnified by policies that facilitate the reallocation of scarce resources to the most productive firms. • The most advanced national firms in some economies have productivity levels close to the global frontier, but their impact on aggregate productivity is muted, to the extent that they are undersized. • Relatively high rates of skill mismatch imply rigidities in labour market matching and constrains the growth of innovative firms and influences wage inequality. Tackling skill mismatch is particularly important in light of the projected slowdown in human capital accumulation and evidence that mismatch has increased over time (EC, 2013a). Moreover, addressing policies to reduce skill mismatch can help improve equality by incentivising firms to pay for better-matched skills. • It is important that young firms either grow rapidly or exit but not linger and become small-old firms. Three policy areas appear to be of key importance to sustain productivity growth: i) foster innovation at the global frontier and facilitate the diffusion of new technologies to firms at the national frontier; ii) create a market environment where the most productive firms are allowed to thrive, thereby facilitating the more widespread penetration of available technologies; and iii) reduce resource misallocation, particularly skill mismatches. Reviving diffusion and improving resource allocation has the potential to not only sustain and accelerate productivity growth but also to make this growth more inclusive, by allowing more firms and workers to reap the benefits of the knowledge economy.