Productivity and Inclusive Growth

Opening address at the OECD Week’s 2016 Forum by Gabriela Ramos OECD Chief of Staff, G20 Sherpa and Special Counsellor to the Secretary-General

Tuesday, 31 May 2016

To the challenges of the global economy, we should add the worrisome trends of declining productivity growth in advanced and emerging economies, and of increased inequalities and opportunities. Both of them constitute a major risk for people’s living standards and well-being, and the OECD has been long documenting them. But we have taken a step forward, and that is to look at their interactions and common foundations, and at ways to address them together. And this is the object of the Productivity and Inclusiveness Nexus report that I am asked to present.

Slowing productivity

Building on our longstanding analysis, the report confirms deeply worrying slowdown in productivity growth.

In all OECD countries and emerging economies, we have seen a decline in productivity growth since the 90s. But the slowdown affects firms differently: leading firms – the so-called ‘global frontier’ firms – have continued to register strong productivity gains, of around 3.5% versus the laggard firms of 0.5%.

A number of factors lie behind this worrying trend, amongst them weak global demand in the aftermath of the crisis, a persistent fall in investment in physical capital, and the decline in business dynamism. The differential is also be the breakdown of the diffusion machine, and the prevalence of skills mist-matches in many sectors. In a broader perspective, Ricardo Hausmann, from Harvard, was right when he said that the main inequality across countries today is the inequality of productivity. 

Rising Inequality

But the productivity slowdown is only one part of the story. The report also highlights that income inequality in several OECD countries has increased to levels unprecedented in the post-war era. Today, the average income of the richest 10% in the OECD is around 9.5 times that of poorest 10%, up from just 7 times 25 years ago.[i] In terms of wealth, the situation is markedly worse. In 2012 the top 10% controlled almost half of wealth. Inequality of income and wealth brings inequality of opportunities, access to quality education, health or quality jobs. And we now, and have confirmed that certain groups of people and regions accumulate disadvantages that looks them in low productive activities.

The Nexus report underlines several areas where these two issues are linked.

First, inequalities of income, education, training opportunities, health, and access to quality jobs or new technologies, likely reduce aggregate productivity and growth because they prevent people and firms and regions from realizing their full potential.

Our work on inequalities proved that, by the lack of investment in skills of the bottom 40 percent of the population, inequality harms growth. We even have worrying evidence of worsening academic outcomes across generations: in 2012 one in six young adults (aged 25-34) attained a lower level of education than their parents.[ii] This is bad for inequality, but also for productivity.

Second, growing productivity dispersion across firms is likely to have contributed to widening of the wage differentials, besides the fact, wages did not keep up with gains in productivity in many countries.

Third, the so-called ‘skill-biased technological change’ hypothesis may also have led to job polarisation. Standard routine work has declined as share of employment by over 20 percent during the 90’s, while high skilled, high wage increased.

Fourth, competition settings, in general in the context of the digital economy, may lead to winner take all dynamics, or rent or regulatory capture by frontier firms. Badly framed regulatory and competition settings framework (both to allow for entry and exit), may have trapped workers and firms in unproductive activities and preventing the reallocation of resources.

Finally, we have some evidence of cases where the financialisation of the economy has harmed but productivity growth and inclusiveness. And there are many other examples.

Policy packages

Looking at the evidence, and advancing a better understanding of the reasons behind these two trends and their linkages is important, but more important is to understand the policy interventions that can produce a double positive effect in both trends. But more than anything avoid policies that by addressing one area harms the other. The OECD proposes a multi-dimensional approach that includes:

First, to help individuals, we need strong education and social policies (to provide not only with quality education and health, but ensure that we are developing the right skills those that are demanding by the labour market. We need better matching, but also a focus on entrepreneurship, tailored skills building, vocational education and lifelong learning. 

For people to succeed, we need a thriving business sector and strong competition, and bankruptcy legislation and regulatory frameworks that allow for better allocation of resources. Competition in the digital world will also ensure a level playing field for incumbents and challenger firms. We should also enable small companies to access finance, technology and high quality skills.

Next, policy prescriptions must take regional and local circumstances into account. Regions and cities have a key role to play by promoting local policies that reduce or remove the barriers limiting access to opportunities. Here I am thinking for instance of housing and transport policies which can play a key role in helping disadvantaged groups avail themselves of training or labour-market opportunities.

More than anything, the productivity-inclusiveness nexus is therefore a major call for policy makers to invest in those at the bottom of the income distribution, not only for moral reasons, but also on economic grounds.

By investing in disadvantage people and regions, and laggard firms, economies will be unlocking higher levels of potential growth and productivity. So this is the invitation, and this is the call that will be emerging from the works of the 2016 Ministerial Meeting led by Chile, and that the OECD will continue advancing in the context of our Inclusive Growth Initiative and we want to thank the Chair for their efforts.

Thank you.

Watch the presentation of the OECD Productivity and Inclusiveness Nexus here.

Learn more about the OECD  2016 Global Forum on Productivity.

[i] OECD Income Distribution Database – http://www.oecd.org/social/income-distribution-database.htm

[ii] OECD (2014), Education at Glance 2014, OECD Indicators, OECD Publishing, Paris, http://dx.doi.org/10.1787/eag-2014-en.

 

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