Oxford Martin Working Paper Series on Economic and Technological Change

Oxford Martin Working Paper Series on Economic and Technological Change Why is Productivity slowing down? Ian Goldin, Pantelis Koutroumpis, François Lafond and Julian Winkler Working Paper No. 2021-6 Disclaimer: This is a working paper and represents research in progress. This paper represents the opinions of the authors and does not represent the position of the Oxford Martin School or other institutions or individuals. For more information on the Oxford Martin Programme on Technological and Economic Change, please visit: https://www.oxfordmartin.ox.ac.uk/technological-economic-change/ For more information on the Oxford Martin Programme on the Future of Work, please visit: https://www.oxfordmartin.ox.ac.uk/future-of-work/ Why is productivity slowing down?* Ian Goldin1,2, Pantelis Koutroumpis1,2, François Lafond2,3, and Julian Winkler1,2,4 1Oxford Martin Programme on Technological and Economic Change, University of Oxford 2Institute of New Economic Thinking at the Oxford Martin School, University of Oxford 3Mathematical Institute, University of Oxford 4Department of Economics, University of Oxford May 9, 2021 Abstract We review recent research on the slowdown of labor productivity and examine the contribution of different explanations to this decline. Comparing the post-2005 period with the preceding decade for 5 advanced economies, we seek to explain a slowdown of 0.8 to 1.8pp. We trace most of this to lower contributions of TFP and capital deepening, with manufacturing accounting for the biggest sectoral share of the slowdown. No single explanation accounts for the slowdown, but we have identified a combination of factors which taken together account for much of what has been observed. In the countries we have studied, these are mismeasurement, a decline in the contribution of capital per worker, lower spillovers from the growth of intangible capital, the slowdown in trade, and a lower growth of allocative efficiency. Sectoral reallocation and a lower contribution of human capital may also have played a role in some countries. In addition to our quantitative assessment of explanations for the slowdown, we qualitatively assess other explanations, including whether productivity growth may be declining due to innovation slowing down. JEL codes: O40, E66, D24. *Acknowledgements. We are indebted to Nils Rochowicz for excellent research assistance, and grateful for the helpful comments of Beatrice Faleri, Anton Pichler, Matteo Richiardi, Luis Valenzuela, Jangho Yang, and the ed- itor and anonymous reviewers of this paper. Participants in the discussions and seminars on this paper at the OECD, INET, European Commission JRC, and Arrowgrass also enriched our work, which would not have been possible without funding support from the Oxford Martin School Programme on Technological and Economic Change, the Institute for New Economic Thinking at the Oxford Martin School, Citi and Baillie Gifford. Contacts. [email protected]; [email protected]; [email protected]; [email protected]. 1 1 Introduction Labor productivity growth is widely seen as the main long-run determinant of per capita output growth and improving living standards1. The decline in measured labor productivity growth over recent decades is a matter of con- siderable concern and debate among academics, as it is in business and government. Three decades after Robert Solow’s famous quip that ‘you can see the computer age everywhere but in the productivity statistics’ (Solow 1987), this slowdown remains a puzzle, not least for those who believe that technological change is accelerating. LP growth GDP per “Missing” GDP Slowdown 1996-2005 2006-2017 capita 2017 per capita France 1.65 0.66 0.99 ¿30,512 ¿3,836 Germany 1.85 0.91 0.94 ¿35,217 ¿4,203 Japan 1.68 0.85 0.82 ¥4,155,243 ¥356,944 United Kingdom 2.21 0.45 1.75 £27,487 £6,443 United States 2.62 1.00 1.61 $59,015 $12,610 Table 1: Labor productivity slowdown and per capita GDP gap. Growth of labor productivity is per hour worked, and GDP per capita is in 2017 national currency units, using data from EU-KLEMS 2019 (Stehrer et al. 2019) and the Conference Board. The periods for Japan (1995-2015) and the US (1998- 2017) are slightly different to due to data coverage, see Appendix A.1 for details. The slowdown is indisputable. Table1 demonstrates that labor productivity growth rates have at least halved since the 1995-2005 period, making GDP per capita in 2017 several thou- sand dollars lower than it would have been based on the previous trend (Syverson 2017). Why is productivity slowing down? Broader historical context. By definition, a slowdown is by comparison to a previous period of faster growth, so a starting hypothesis is simply that previous rates of growth were excep- tional, and could have been the result of an adjustment of productivity levels, rather than a permanent increase in growth rates. Thus, the current slowdown should be considered within the broader historical context. On long run historical time scales, fast productivity growth is a relatively recent phenomenon. Within the 20th century, Bergeaud et al.(2016) identify two major accelerations, and subsequent slowdowns: the large postwar boom and a smaller acceleration around 2000, generally associated with gains from Information and Communication Technologies (ICTs). The second acceleration is typically invoked as explanation of the US slowdown: since growth was already sluggish in the 80’s, the fairly high rates of the late 1990’s/early 2000’s constituted a “productivity revival” (see Figure1), and therefore, the low rates after around 2005 constituted, in comparison to the revival, a slowdown. In Europe and Japan, in con- trast, labor productivity growth was relatively high in the 80’s, so the slowdown appears more secular, but could in principle just reflect the end of convergence to the frontier. 1By definition, the growth in output per capita is equal to the growth in output per worker plus the growth of the ratio of number of workers over the total population. In this paper, we focus on the first term, labor productivity, but changes to labor participation and employment rates have been (and will continue to be) important, particu- larly due to aging (see e.g. Ramey et al.(2020) and Vollrath(2020)). We also mostly exclude from our discussion the debate over which measure of output is the best metric for welfare evaluation. 2 4 3 2 1 France Germany Japan % per year (5−year centered rolling average) (5−year % per year 0 UK US 1985 1990 1995 2000 2005 2010 2015 Figure 1: Recent trends in labor productivity. Data from the Long-Term Productivity Database (Bergeaud et al. 2016). While there is some truth in the fact that the current low productivity growth rates simply reflect a more “normal” growth rate for a set of economies that are now all “frontier”, the current slowdown goes beyond this. In Appendix A.2 we show two things. First, there was no convergence in the 1995-2005 decade, so slower convergence cannot explain the slower rates in Europe after 2005 compared to 1995-2005. Second, while it is true that the frontier (US) may be returning to more “normal” rates of growth after the 1995-2005 IT boom, the rates of labor productivity growth in all countries are still broadly speaking lower than at any time in the 20th century, and are low in all the 5 countries we study at the same time. Thus, while we see part of slowdown as simply reflecting the fact that all 5 advanced economies are now more or less frontier economies progressing at a “normal” rate, the rates observed are very low by historical standards and appear surprising in a context of technological transformations. That said, throughout the paper, we examine the role of both secular trends, such as aging and structural change, and cyclical or market phenomena, such as declines in investment. Major theories: past and present. Our investigation builds on work which sought to explain previous slowdowns. Early research emphasized the importance of the relative share of different industries, with, for example, Nordhaus(1972) attributing the 1965-71 slowdown to a changing industry mix towards industries with a lower productivity level. Baily & Gordon (1989) argued that there is a one-off effect of technology, where productivity growth is in- terpreted as an adjustment toward a higher level, while accounting for implementation lags. Bruno(1982) largely attributed the 1973-79 slowdown to the productivity-reducing adapta- tion of capital to rising energy costs. Notions of input utilization and mismeasurement were prominent, with for example a decline in the capital services obtained from a given level of capital stocks seen to arise from energy-intensive capital being utilized less intensively and scrapped faster (Baily et al. 1981). Sichel(1997) and Baily et al.(1981) examined the e ffect 3 of mismeasurement and found that it explained less than a third of the aggregate slowdown. Mismeasurement and lags in technological adoption also featured prominently in explanations of the productivity paradox of the 90’s, together with an emphasis on complementary investment and adjustment costs (David 1990, Brynjolfsson 1993, Brynjolfsson & Hitt 2000). Many of these theories remain relevant to an understanding of the recent productivity slowdown2, including: mismeasurement (Byrne et al. 2016, Syverson 2017), structural change (Baily & Montalbano 2016, Gordon & Sayed 2019), properties of the capital stock (Goodridge et al. 2018), the recognition that many productivity-enhancing factors are one-off effects (Gor- don 2016, Gordon & Sayed 2019), and lags in translating new technologies into productivity (Brynjolfsson et al. 2021). But there are also new theories, and a deeper analysis of previously explored topics which we review.

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