Writing in the Journal of Economic Literature, Ian Goldin, Pantelis Koutroumpis, François Lafond and Julian Winkler identified that while labour productivity growth was healthy from 1996 to 2005 in France, Germany, Japan, the UK and the US, the following decade saw growth rates decline by at least half. According to the researchers, ‘this slowdown remains a puzzle, not least for those who believe that technological change is accelerating.’
However, they also found a combination of factors could account for much of this slowdown.
To escape poverty and thrive societies need to become more productive, and yet in much of the world productivity growth has slowed down, with technological and other advances not reflected in improved economic growth or average incomes.
- A decline in capital deepening – the authors identified that a slowdown in investment was a major reason for economic growth slowing down, driven by a mix of cyclical factors such as the financial crisis of the later 2000s; and longer-term factors including the shift to more intangible forms of capital.
- A lower growth of allocative efficiency – The evidence suggests that the rates for new firms entering and exiting the market have declined, and that pure profits and concentration (the market share of leading firms) have gone up. As a result, there is a concern that productivity growth from an improved allocation of resources has slowed down.
- Mismeasurement – the study found that aggregate productivity may have become increasingly mis-measured, due to increased difficulties in measuring the impact of new digital services on the economy, accelerated mismeasurement from quality adjustments of new digital services, and biases in imputing inflation rates for new products.
- A slowdown in global trade – this resulted from a drop in trade following the financial crisis, and also probably due to countries already making the most of the possible benefits from trading with each other over the past few decades.
The study also looked at the impact of innovation on long-term growth, identifying that overall investment in research and development increasingly is undertaken by the private sector rather than governments and this might undermine the positive impact on productivity. However, the researchers cautioned that it would take time to see what effect new technologies and innovations would have on productivity.
Ian Goldin, Professor of Globalisation and Development and founding Director of the Oxford Martin School, said:
‘To escape poverty and thrive societies need to become more productive, and yet in much of the world productivity growth has slowed down, with technological and other advances not reflected in improved economic growth or average incomes.
‘Our study is the first to carefully review and rank the dozens of possible explanations. It examines the scale, scope and sequence of causes of the slowdown, offering insights which could reverse this.’
Pantelis Koutroumpis, Co-Director of the Oxford Martin Programme on Technological and Economic Change, said:
‘The reversal of the decade-long productivity slowdown remains one of the most challenging tasks that governments around the world are trying to address. Our study helps in this direction as it quantifies the key contributors of this decline and their relative importance for five leading economies.’
François Lafond, Deputy Director of the Complexity Economics Programme at the Institute of New Economic Thinking (INET), said:
‘Our study cautions against simple explanations, and emphasises the difficulties in measuring and diagnosing qualitatively evolving economies. It also makes it clear that the fundamentals remain valid: income grows by investing more resources, more efficiently. When these drivers slow down, income growth slows down.’
Julian Winkler, DPhil student at INET Oxford and the Department of Economics at Oxford University, said:
‘On the global scale, a few events majorly contributed to recent patterns in productivity; new ICT and digital technologies, expanding global supply chains, even the financial crisis. We demonstrate the need to look forward and identify similar opportunities, or challenges, so that living standards can grow towards new frontiers.’
