Date published: Jun 2022
SUERF Policy Brief, No 348
by Andreas Breitenfellner, Robert Holzmann, Richard Sellner, Maria Silgoner and Thomas Zörner1
Download: SUERF Policy Brief, No 348 (0.57 MB)
Achieving high productivity growth is a central goal of policymaking because productivity impacts not only on key macroeconomic variables, but also on a country’s living standards and the resource inputs necessary for production. In particular, central banks have an intrinsic interest in promoting productivity given its interaction with the natural rate of interest r*, which crucially shapes the monetary policy space. A variety of factors help explain weak productivity dynamics in industrial countries in the past decades. They range from low demand, expansionary monetary policy, specific firm characteristics, technological and financial market dynamics as well as demographics to the burden of regulation. In the years ahead, digital transformation and climate change may add to the list of crucial factors. To promote productivity, we will need a multifaceted and country-specific policy mix; “one-size-fits-all” policies are deemed suboptimal.
Achieving high productivity growth is a central goal of policymaking in most industrialized countries. This is attributable to the key role productivity growth plays for variables such as income per capita, supply of goods and services, wage growth and international competitiveness. The lower the productivity is, the more the income level depends on resource use. This makes production processes inefficient and environmentally unsustainable.
Central banks have an intrinsic interest in promoting productivity growth because of its interaction with the natural rate of interest r*, which crucially shapes the monetary policy space. Changes of long-run productivity growth are conjectured to impact on r* and vice versa. The slow productivity growth which we have been seeing in the current period of very low interest rates may therefore not be a coincidence. In contrast to the negative textbook relationship in the short run, higher interest rates may incentivize savings and induce larger investment returns in the long run, potentially amplifying productivity growth. In figure 1, the correlation between a common proxy of productivity growth and r* appears to be positive. However, this relationship, which strongly depends on the model specification, the employed productivity measure and the time horizon, has given rise to a plethora of studies and hypotheses, which we reviewed in Breitenfellner et al. (2022).
Major advancements in production techniques in the past (e.g. the industrial revolution) had tangible positive effects on productivity growth. This is why we would also expect recent achievements to have a visible impact on productivity measures. Yet, the ongoing digital transformation notwithstanding, labor productivity growth has slowed down in advanced economies since the 1970s and has virtually stagnated since the mid-2000s (figure 2). In the euro area, annual growth in labor productivity declined from 1.1% in 1996 to below 0.6% in 2019.
The US has outperformed European countries over the last decades, which is partly due to its stronger investment and faster implementation of ICT-related technologies. Factors that may have also benefited the US are demographics, higher firm dynamism and different management practices. Moreover, financial market characteristics have a role to play: in the US, especially SMEs and start-ups find it easier to avail themselves of equity-based sources of finance. Within Europe, we observe a North-South gap when it comes to productivity growth. This gap is related to differences in ICT capital intensity, the quality of public governance, the regulatory burden, the importance of SMEs and their financial constraints, and also to the efficiency of the labor market and the educational system.
We have surveyed the theoretical and empirical literature to learn more about the key drivers of the recent productivity slowdown. In Breitenfellner et al. (2022), we define nine hypotheses. Each tackles the productivity puzzle from a different angle. Here, we briefly summarize the main points and policy measures we suggest with a view to counteracting the negative effects on productivity:
While all these factors may have contributed to the past productivity puzzle, some of them may gain importance (e.g. demographics as a result of population aging), and other factors may fade (e.g. the lagged effects of the 2008/09 financial crisis). At the same time, new factors may come into play and shape future productivity trends:
Given the manifold and time-varying reasons of subdued productivity growth, finding the right policy mix is challenging. “One-size-fits-all” policies are deemed suboptimal to combat weak productivity growth. The relative weight of appropriate measures depends on the current stage of a country’s development as well as its history and the prevailing business environment. Hence, policies may differ widely across regions.
Given central banks’ intrinsic interest in the level and trend of productivity, they may play an active role in promoting productivity and its measurement and thus supporting policymakers to find the right policy mix. They can do so (1) by giving well-founded advice to policymakers and by promoting rigorous monitoring and evaluation of productivity-enhancing measures; (2) by helping advance research in areas of importance for future productivity growth; and (3) by initiating and funding projects to better exploit existing data sources and collect new data, while specifically using the increasing availability and accessibility of firm-level data.
Breitenfellner, A., Holzmann, R., Sellner, R., Silgoner, M. and Zörner, T. (2022): “Quo vadis, productivity?”, OeNB Occasional Paper No.1, March.
Holzmann, R. (2013): “An Optimistic Perspective on Population Aging and Old-Age Financial Protection”, In: Malaysian Journal of Economic Studies 50(2): 107–137.
Holzmann, R., Robalino, D. and Winkler, H. (2020): “NDC Schemes and the Labor Market: Issues and Options”, in: Holzmann, R., Palmer, E., Palacios, R. and Sacchi, S. (eds.): “Progress and Challenges of Nonfinancial Defined Contribution Pension (NDC) Schemes, Volume 1: Addressing Marginalization, Polarization, and the Labor Market”, Chapter 15. Washington, D.C.: The World Bank.
Silgoner, M. (2022): “Conference on European Economic Integration 2021: Recalibrating tomorrow’s global value chains – prospects for CESEE”, In: OeNB Focus on European Economic Integration Q1/22.
About the authors
Andreas Breitenfellner is Senior Principal at the International Economics Section of the Oesterreichische Nationalbank (OeNB), which he joined in 1999. For several years, he was seconded to the European Commission (DG ECFIN) and the Austrian Delegation to the OECD in Paris. He obtained a master’s degree in social economics at the Johannes Kepler University Linz and a diploma in international relations from the Johns Hopkins University in Bologna. He analyzes and publishes on climate economics and green finance issues, Economic and Monetary Union, inflation, energy prices and structural policies.
Robert Holzmann is an Austrian economist, Governor of the Austrian Central Bank und member of the Governing Council of the European Central Bank (since 2019), and elected member of the Austrian Academy of Sciences (since 2014). He holds honorary positions at the South-Western University in Economics and Finance, Chengdu, University of Malaya, Kuala Lumpur and University of New South Wales, Sydney. Before his return to academia in 2011, he held various positions at the World Bank including for 12 years Sector Director and acting Senior Vice President. Before joining the World Bank in 1997 he was academic in Austria and Germany, and senior economist at the IMF and OECD. He has published 41 books and over 200 articles on financial, fiscal and social policy issues.
Richard Sellner is an economist at the Business Cycle Analysis Section of the Oesterreichische Nationalbank (OeNB), which he joined in early 2021. Between 2006 and 2021 he worked at the Institute for Advanced Studies in Vienna as a Senior Researcher in the macroeconomics and economic policy group. His research interests include Research, Development and Innovation Policy, Economic Policy Evaluation, International and Transport Economics, Forecasting and Econometric Model Development. He graduated from the Vienna University of Economics and Business (Master’s and Doctoral degree in Economics).
Maria Silgoner is Senior Principal in the International Economics Section of the Oesterreichische Nationalbank (OeNB), which she joined in 1999. Her research focusses on financial literacy and education; competitiveness and trade; internal and external imbalances; and the European integration process. She has regular teaching engagements at universities (University of Vienna, University of Innsbruck, the Lauder Business School), at the Joint Vienna Institute and for the ESCB’s internal training program. She graduated from the University of Vienna (Master’s and Doctoral degree in Economics) and has a postgraduate diploma in Economics from the Institute for Advanced Studies, Vienna.
Thomas Zörner is an economist in the Monetary Policy Section of the Austrian Central Bank (OeNB) and an assistant professor at the Vienna University of Economics and Business (WU Wien). His research focusses on business and credit cycle dynamics including monetary policy, Bayesian econometrics and nonlinear models. Previously, he also served as a consultant at the United Nations Industrial Development Organization and as a researcher at Masaryk University Brno (Czech Republic) and the University of Salzburg (Austria).
SUERF Policy Briefs (SPBs) serve to promote SUERF Members’ economic views and research findings as well as economic policy-oriented analyses. They address topical issues and propose solutions to current economic and financial challenges. SPBs serve to increase the international visibility of SUERF Members’ analyses and research. The views expressed are those of the author(s) and not necessarily those of the institution(s) with which the author(s) is/are affiliated.
Editorial Board: Ernest Gnan, Frank Lierman, David T. Llewellyn, Donato Masciandaro, Natacha Valla.
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