Since the late 1990s, labor productivity (total output per hour worked) growth has slowed markedly for many of the world’s largest economies. Using a micro-level dataset of firms in OECD member countries, OECD researchers Dan Andrews, Chiara Criscuolo, and Peter Gal decompose the slowdown and show that the top (“frontier”) firms have continued seeing productivity increases while the others (the “laggards”) haven’t, contributing to a growing productivity divergence between the top and the bottom.
According to their analysis, frontier firms in manufacturing experienced productivity increases of 2.8 percent per year on average between 2001 and 2013, whereas the others saw gains of only 0.6 percent per year. In the services sector, the gap was even larger: Frontier firms’ productivity increased at 3.6 percent per year, but for non-frontier firms that number was only 0.4 percent. The chart below shows how these gains accrued from 2001 to 2013: the scale roughly corresponds to total percent increase (where 0.2 equals 20 percent).
The authors find that the productivity growth of the frontier firms, which are now three to four times more productive than non-frontier firms, is not the result of increased capital investment, and due only partly to increased monopolistic pricing power. Rather, it appears to be driven by growth in multi-factor productivity (MFP), or how efficiently firms can combine capital and labor into products.
As for what’s causing the different MFP growth rates, they find some support for two theories. First, “winner takes all” dynamics appear to be at play. In industries with particularly scalable technologies like computer programming and telecommunications, the market share of the frontier firms has gone up, the divergence is “more pronounced,” and there has been greater divergence between the top and bottom frontier firms. This could be good news if booming frontier firms raise industry averages, but in practice those industries where the frontier/non-frontier gaps have been the widest have seen lower growth rates overall, indicating that laggard growth has been very weak.
Second, they argue there has been a slowdown in technological diffusion. They see public policy as partly to blame because the productivity growth gap between frontier firms and laggards is greatest in industries in which regulation restricts competition. In fact, their estimates suggest “that up to 50% of the increase in MFP divergence may have been avoided if countries had engaged in extensive market liberalisation in services.”