The Future of Productivity_Dan Andrews_Chiara Criscuolo_Productivity Summit_6-7 July 2015_Mexico

THE FUTURE OF PRODUCTIVITY

Dan Andrews (Economics Department)

Chiara Criscuolo (Directorate for Science, Technology and Innovation)

Global Dialogue on The Future of Productivity

Mexico City | 6 July 2015

… productivity isn't everything, but in the long run it is almost everything.

Paul Krugman, 1994

1. Productivity: now more than ever

2. Thinking about productivity: frontier firms and

diffusion

3. Productivity in a globalised world: structural

and policy drivers

4. Policy messages and issues for future

research

Outline

PRODUCTIVITY: NOW MORE THAN EVER

Differences in GDP per capita

Percentage differences compared with the upper half of OECD countries, 2013

Source: OECD Going for Growth Database.

Differences in GDP per capita mostly

reflect labour productivity gapsPercentage differences compared with the upper half of OECD countries, 2013

Source: OECD Going for Growth Database.

Productivity growth slowed across

the OECD, even before the crisisLabour productivity growth since 1990

GDP per hour worked (China and India refer to GDP per worker)

Source: OECD calculations based on the Conference Board Total Economy Database.

• Techno-pessimists vs techno-optimists

Productivity will be the key driver of

future growth but uncertain outlook

• Techno-pessimists vs techno-optimists

• Given this uncertainty, we need to find sources of

productivity growth where there is large and sure

scope for improvement.

• Two key sources of growth emerge:

1. Effective diffusion

2. Efficient resource allocation, especially skills.

• Effective diffusion and skill matching can be good

for both growth and equity.

Productivity will be the key driver of

future growth but uncertain outlook

THINKING ABOUT PRODUCTIVITY: FRONTIER FIRMS AND DIFFUSION

1. Widespread heterogeneity: very high MFP and very low

MFP firms coincide within narrowly-defined industries.

2. Adoption lags for new technologies across countries

have fallen, but long-run penetration rates once

technologies are adopted have diverged (Comin &

Mestieri, 2013).

3. MFP growth of laggard firms is more closely related to

productivity developments at the national frontier (NF),

as opposed to the global frontier (GF).

New GF technologies do not immediately diffuse to all firms.

They are first adopted by NF firms, and diffuse to laggards

once they are adapted to national circumstances.

Analytical framework

Analytical framework

Global

frontier

National

Frontier

Laggards

Adoption

convergence

Penetration

divergence

The globally most productive firms

– who are they?

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries”, OECD Mimeo.

Mean Std Dev Number Mean Std Dev Number

Productivity 4.06 1.04 3657 2.51 0.91 294031 1.5 ***

Employment 309 3770 3657 229 4119 294031 81

Capital stock (€m) 31 355 3657 19 343 294031 12 **

Turnover (€m) 250 1731 3657 59 754 294031 191 ***

Profit rate 0.57 0.33 3657 0.13 6.33 294031 0.45 ***

Age 21.5 20.3 3657 23.2 18.6 294031 -1.7 ***

MNE status*

Probability 0.47 0.50 3450 0.28 0.45 310765 0.19 ***

Patenting status

Depreciated patent stock 3.71 45.15 3657 0.90 56.17 294031 2.8 ***

Multi Factor Productivity (Solow)

Selected OECD Countries, 2005 (unless otherwise noted)

Global Frontier Firms Non-Frontier FirmsDifference

in means

Mean firm characteristics: frontier firms and non-frontier firms

Firms at the global productivity

frontier have become olderAverage age (years) of firms in the frontier and non-frontier groups

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries”, OECD Mimeo.

Manufacturing Services

TFPnace2Solow W4_Services

Notes: Frontier is measured by the top 100 firms in each 2-digit industry and each year, based on Solow residual-based MFP.

15

20

25

30

Non-frontier Frontier

15

20

25

30

Non-frontier Frontier

… consistent the broader decline in

business dynamismDeclining start-up rates across OECD countries

Source: C. Criscuolo, P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers, No. 14.

Analytical framework

Global

frontier

National

Frontier

Laggards

Adoption

convergence

Penetration

divergence

The breakdown of the diffusion

machineSolid growth at the global productivity frontier but spillovers disappointed

Labour productivity; index 2001=0

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries”, OECD Mimeo.

PRODUCTIVITY IN A GLOBALISED WORLD: STRUCTURAL & POLICY DRIVERS

Three areas for policy:

1. Pushing out the global frontier

2. Reviving the diffusion machine

3. More efficient resource allocation,

especially skills.

Note: #2 partly depends on getting #3 right

How to revive productivity growth?

• Higher and more efficient public investment in

basic research.

– Role for international co-operation?

• Enabling experimentation of firms with new

technologies and business models.

– Reduce barriers to firm entry and exit to

enable high productivity firms to grow and low

productivity firms to exit.

Pushing the frontier: keep the

innovation engine running

Three areas for policy:

1. Pushing out the global frontier

2. Reviving the diffusion machine

3. More efficient resource allocation,

especially skills.

Note: #2 partly depends on getting #3 right

How to revive productivity growth?

Reviving the diffusion machine:

structural factors shape diffusionEstimated frontier spillover (% pa) associated with a 2% point increase in

MFP growth at the global productivity frontier

Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier: Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.

Globalisation Reallocation Knowledge-Based Capital

Services are the oil that greases the

wheels of globalisationA: Value added share of domestic services in

gross exports has been rising

Upshot: an inefficient domestic services sector can erode the productivity

benefits of globalisation. Here, there is a big role for policy.

B: Resource misallocation in services

is a problem

Source: Panel A OECD TiVA Database. Panel B: Andrews, D. and F. Cingano (2014), “Public Policy and Resource Allocation: Evidence from Firms in OECD Countries”, Economic Policy, 29(78), pp. 253-296.

Policies shape the diffusion of new

innovations from the global frontierEstimated frontier spillover (% pa) associated with a 2% point increase in MFP

growth at the global productivity frontier

Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier: Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.

Entry and Exit Innovation policies

Policies to facilitate the catch-up of

laggards to the national frontierImpact of policy reforms on the MFP growth of laggard firms, 2005

Reducing PMR from high level in Greece to the OECD average

% difference between industries with high and low firm churning

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries”, OECD Mimeo.

Three areas for policy:

1. Pushing out the global frontier

2. Reviving the diffusion machine

3. More efficient resource allocation,

especially skills.

Note: #2 partly depends on getting #3 right

How to revive productivity growth?

Aggregate gains from diffusion is

magnified by efficient reallocation

Source: Andrews, Criscuolo and Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries ” OECD Mimeo.

How much higher would overall manufacturing sector labour productivity

be if NF firms were as productive and large as GF firms?

NF firms in Italy have productivity levels close to the GF but they are relatively small

… but up-scaling can be difficult

Post-entry growth - average size of young and old firms

Source: C. Criscuolo, P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers, No. 14.

Manufacturing Services

0

10

20

30

40

50

60

70

80

Startups (0-2) Old (>10)Employees

0

10

20

30

40

50

60

70

80

Startups (0-2) Old (>10)Employees

Skill mismatch as a constraint on the

growth of innovative firms

Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.

Skill mismatch, particularly over-skilling, is harmful for productivity because it constrains the ability of innovative firms to attract skilled workers and grow.

Policies to support efficient

resource allocation

OECD research shows that efficient resource

allocation is promoted by:

Low administrative burdens on start-up firms

Less stringent employment protection legislation

Bankruptcy legislation that does not excessively

penalise business failure

Availability of seed and early stage financing

Reducing skill mismatch requires a

range of policiesThe probability of skill mismatch and public policies

Source: Adalet McGowan, M and D. Andrews (2015), “Skill mismatch and public policy in OECD countries” OECD Economics Department Working Paper, No. 1210.

Entry and Exit Labour mobility Education

POLICY MESSAGES& ISSUES FOR FUTURE RESEARCH

Framework policies

1. Pro-competition product market reforms, esp. in services

2. Exit matters: bankruptcy legislation that does not

excessively penalise failure

3. Policies that do not inhibit labour and residential mobility

4. Education & social policies to help workers adapt to

technological change and the costs of reallocation

Innovation policies

1. Public investment in basic research

2. Collaboration between firms and universities

3. R&D fiscal incentives and IPRs but design is crucial

Policies to revive productivity

growth

The crisis: cleansing or scarring?

The jury is still out…Average employment growth across the firm MFP distribution

Deviation from 2002-10 average; selected European countries – business sector

Notes: Authors calculations based on production survey data from ESSLait. Unweighted average of 11 countries: AT, DE, DK, FI, FR, IT, NO, NL, PO, SE, UK. A common (European) industrial structure is employed to aggregate industries.

But comparison with past recessions is difficult

The crisis: most jobs were destroyed

by the downsizing of old incumbentsContributions to aggregate net job creation by entrants, young/old exitors, and

young/old incumbents.

-8

-6

-4

-2

0

2

4

6

8

Co

ntr

ibu

tio

n t

o a

gg

reg

ate

ne

t jo

b c

reati

on

Young (entry) Young (exit) Young (incumbents)

Old (exits) Old (incumbents) Total%

Source: C. Criscuolo, P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers, No. 14.

New harmonized and representative data to study

the micro drivers of aggregate productivity.

– creative destruction process across countries and

its contribution to productivity growth;

– Within-sector productivity dispersion and efficient

allocation of resources.

New questions: link between productivity with

wage inequality and their trends

Develop better policy indicators:

– Bankruptcy legislation;

– IP systems.

New cross-country data sources

• OECD (2015), “The Future of Productivity”. OECD, Paris

• Adalet McGowan, M. and D. Andrews (2015a), “Labour Market Mismatch and Labour Productivity: Evidence from PIAAC Data”, OECD Economics Department Working Papers, No. 1209.

• Adalet McGowan, M. and D. Andrews (2015b), “Skill Mismatch and Public Policy in OECD Countries”, OECD Economics Department Working Papers, No. 1210.

• Andrews, D., C. Criscuolo and P. Gal (2015), “Frontier Firms, Technology Diffusion and Public Policy: Micro Evidence from OECD Countries”, OECD Mimeo, forthcoming.

• Calvino, F., C. Criscuolo and C. Menon (2015), “Cross-country Evidence of Start-Up Dynamics”, OECD Science, Technology and Industry Working Paper.

• Criscuolo, C., P. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers, No. 14.

• Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier: Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.

The following reports detail the

results: