Productivity in a time of change: Puzzles, prospects, and policies

Productivity is a key driver of long-term economic growth. The past couple of decades have seen a broad-based slowdown in productivity growth across economies. Technological advances are a major source of improvements in productivity, so a big puzzle is why productivity growth has slowed over a period that has witnessed a boom in new technologies led by digitalization. How have global shocks such as the COVID-19 pandemic affected productivity? How will the new waves of advances in digital transformation, notably artificial intelligence (AI), affect future productivity growth? There are both important puzzles about the recent history of productivity growth and important questions about its future.

To discuss these puzzles and questions, on April 11, 2023, Brookings and the Korea Development Institute (KDI) held a seminar at Brookings on “Productivity in a time of change.” In addition to scholars from Brookings and KDI, participants included experts from academia, international institutions (the International Monetary Fund, the World Bank, the Organization for Economic Co-operation and Development, and the European Bank for Reconstruction and Development), and the U.S. Federal Reserve System.

The discussion took place in three sessions. The first session examined the big picture on productivity trends, their drivers, and implications for potential economic growth in the future. The second session delved deeper into key issues, looking more closely at the implications of technological change and global shocks, and going beyond macroeconomic trends to the sector and the firm level. The discussion had global coverage—spanning advanced and emerging economies—but it also looked more closely at particular regions and countries. The third and final session focused on Korea. The discussion addressed the implications of the research findings for public policy. All presentations made at the seminar are available for download on this page.

In his keynote presentation, Chad Syverson suggested some reasons for optimism about productivity prospects. Against the background of slowing productivity growth in the global economy in the past couple of decades, he pointed to evidence of increased economic dynamism (e.g., new firm formation and increased labor mobility) in the U.S. and Europe in recent years, especially in the post-COVID-19 period, that could propel a resurgence of productivity growth. He also argued that because of lags and J-curve effects, we can expect to see a bigger boost to productivity from digital technologies than has so far been the case. And that this could particularly be the case with the latest innovations, notably AI, where we are at a very early stage of adoption. He also brought up issues arising from the increased importance of intangibles in the digital and knowledge economy that can bias the measurement of productivity.

Martin Baily emphasized the roles of soft innovation (e.g., new business models, product and process design, and organization of production), skills of managerial and technical staff, and the competitive and regulatory environment in influencing productivity trends and cross-country differences. Reviewing research findings, he noted that the information technology (IT) sector itself has achieved strong productivity growth over periods of time; however, IT so far has not produced a broader economy-wide and sustained increase in productivity growth.

The presentation by Ayhan Kose and Franziska Ohnsorge showed that potential growth slowed across advanced and emerging economies over the past decade as all drivers of potential growth—productivity, capital, and labor—weakened. Their analysis suggests that, on current trends, global potential growth could weaken further in the current decade. But it also gives a hopeful message that, with stronger reform efforts, the trend of declining potential growth can be reversed.

Chiara Criscuolo highlighted the role of increasing productivity dispersion among firms as an explanation for the declining productivity growth in recent decades. Her presentation showed that the benefits of digital transformation have been captured largely by firms at the technological frontier, while productivity growth in the rest of the firms has been meager—a dynamic that lowers aggregate productivity growth, increases industrial concentration and weakens competition, and also contributes to higher economic inequality. She made the case for a mix of policies—spanning competition and regulation, workforce reskilling and upskilling, digital infrastructure, and research and development (R&D)—to promote a wider diffusion of new technologies across sectors and firms.

Florence Jaumotte addressed the impact of the COVID-19 pandemic. Her presentation pointed to potential positive implications for productivity and the labor market: for productivity, through increased investment in digitalization after the pandemic, especially by smaller and less digitalized businesses; and for the labor market, through an increase in labor force participation and hours worked facilitated by teleworking. But she also advised caution in interpreting these results because the post-pandemic data so far cover only two years.

Lorenzo Ciari focused on productivity growth trends in European economies. He finds that while productivity growth has declined in Europe in recent decades, mirroring trends elsewhere, two key factors that explain the weaker productivity performance of advanced economies in Europe relative to the U.S. are: (i) less investment in digital technologies and intangible assets such as knowledge; and (ii) weaker economic flexibility and dynamism. He also finds that a stronger public policy response helped shield productivity growth better during the COVID-19 shock than during the global financial crisis and the ensuing Great Recession.

Three presentations focused on important dimensions of productivity dynamics in Korea. Joonghae Suh presented research findings that call for improvements in the innovation ecosystem in Korea, including a redefinition of the roles of government and universities in R&D, to promote and disseminate innovation more widely across the economy. As firms pay more attention to environmental, social, and governance (ESG) issues, how does this transition affect their productivity? Jong Hwa Lee presented research findings that show a positive correlation between the ESG scores of Korean firms and their labor productivity. Also using firm-level data, Jinkook Lee showed that technology adoption positively impacts productivity and that firm management and employee human capital and innovation capabilities are key correlates of technology adoption. He finds that gaps between large and small firms in technology adoption and productivity performance have been widening.

The presentations at the seminar and the discussion that followed (discussant comments are available for download on this page) exemplified the richness of recent and ongoing research on productivity. This research sheds important light on productivity trends and drivers. Yet, as the discussion revealed, in our time of significant economic change, there are not consensus explanations for many puzzles, especially those arising from technological advances that are reshaping markets and economies and affecting productivity and growth and distributional dynamics in complex ways. Some decades back, Moses Abramovitz dubbed total factor productivity, estimated as a residual, “a measure of our ignorance” of the growth process. The new technologies are adding to the complexity of measuring and analyzing productivity, not least because they are increasing the role of intangibles in the production process, on both input and output sides. It was clear from the discussion that research into understanding the productivity-technology nexus in the new world of digital transformation is very much a work in progress.

Is a turnaround in productivity growth in the offing following the declining trend of the past couple of decades? The discussion suggested an uncertain outlook, pointing to both negative and positive factors that could shape the future trajectory of productivity growth. But one message was clear: Policies matter. Economic transformations in the digital age create new challenges for public policy, from competition policy and regulation to education and workforce development to digital infrastructure and the innovation ecosystem. Much will depend on how policies respond to these challenges of change.