RAISING EU PRODUCTIVITY: LESSONS FROM IMPROVED MICRO DATA [MICROPROD]

Labour productivity has slowed down atypically over the last decade or so in the developed world. That means that workers on average are not becoming more productive at quite the same speed as they used to.
A similar picture in terms of how labour productivity has slowed down is seen for total factor productivity, i.e. when considering all factors of production, including capital. This is despite technological advancements continuing, and thus offering opportunities for innovation, as well as firms progressively integrating in global value chains, and therefore encouraging competition and gains in efficiency. All of these would suggest improvements in productivity vs. the observed slow down, a paradoxical situation that indicates how poor and incomplete our understanding of the underlying mechanisms at work is.

The consequences of this slow down are not innocuous. Contrary to a long-term trend, the current generation expects that future generations may earn less than they do, raising issues about intergenerational transfers and sustainability of welfare systems across generations. At the same time, the benefits of the small productivity improvements are accruing disproportionately to capital over labour. The distribution of wealth is therefore becoming increasingly and very visibly unequal, a fact that causes societal anxiety and unrest. Understanding why this occurs is crucial as we prepare for the post financial crisis era.

But what is the root cause of this productivity slow down? Some have argued that part of the answer lies in the way we measure productivity. Outdated methodologies are not in the position to capture how value is created given current technology and therefore vastly underestimates the advancements in productivity. Others are increasingly paying attention to the role of intangible investments, in particular as digital business models are becoming increasingly successful. The argument here is that digital firms have the ability to scale up and produce more without proportional increases in capital. If you are Facebook, you can increase the number of people you reach (and therefore the potential for income) without much additional investment. By contrast, a department store would need to invest in property and people if it wanted to expand its operations. Measured aggregate productivity trends may underestimate future productivity growth when increases in aggregate expenditures disproportionately go to intangible intensive firms. Similarly, tracking productivity changes in real time is made difficult because the returns to intangible investment may be very delayed.

Furthermore, there are additional implications of intangible investments that are not fully understood. For example, the difficulty in funding intangible investment through traditional financial channels will have a large impact on firms that rely on tangibles. Even before that, as firms grow with little investments they also have fewer assets that can be used for accessing credit, a fact that may distort lending at an aggregate level. Moreover, the implications of an increased role of intangibles for the organisation of firms into global value chains are also unclear.