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Relaunch productivity to boost growth and well-being

 

6/7/15-The slowdown in productivity over the past decade has added to concerns about the long-term economic outlook.  But new OECD research shows that policy reforms can revive the diffusion of innovation and make better use of human talent to clear the path for higher and more inclusive productivity growth.

Productivity is about “working smarter,” rather than “working harder,” and reflects the ability to produce more output by better combining inputs, thanks to new ideas, technological innovations and new business models. The OECD’s latest work on The Future of Productivity identifies impediments to future growth and then proposes policies to address them.

 

“Slower innovation is not the root cause of the current productivity slowdown,” OECD Secretary General Angel Gurría said while launching the new research in Mexico City. “The problem is the pace at which innovations spread throughout the economy, which we refer to as a breakdown of the diffusion machine. To relaunch productivity and reduce inequality, governments should act to help firms to better harness the forces of knowledge diffusion. They also need to focus on skills development and facilitate a more effective allocation of human talent to jobs,” Mr Gurría said.

 

 

The new OECD research shows that the gap between high productivity firms and the rest has been increasing over time, suggesting that there are barriers to the diffusion of new innovations. Labour productivity of the most advanced firms increased at an average annual rate of 3.5% in the manufacturing sector over 2000s, compared to just 0.5% for other less advanced firms within OECD economies.

 

This gap is even larger in the services sector, and is of particular concern since the weight of services in most economies is rising, and services such as logistics, finance and communication are critical to firms’ participation in global value chains.

 

Diffusion is facilitated by global connectedness, experimentation with new ideas, knowledge-based capital and efficient resource allocation, but comes easier to firms in some economies than others.

 

Since the knowledge economy increasingly requires skills that many education systems are struggling to provide, countries will reap greater growth and equity benefits through policies that more effectively allocate skills. Around one-quarter of workers in OECD economies report a mismatch between their existing skills and those required for their job. A better use of human talent supports the growth of innovative firms and could boost labour productivity by up to 10% in some economies, according to the report.

 

The OECD identifies a number of policies to sustain productivity growth, including:

  • Product market reforms and bankruptcy laws that do not excessively penalise failure, to improve firms’ incentives to experiment with new technologies, allocate resources more efficiently and maximise the benefits of participation in global value chains.
  • Policies that make labour mobility easier. These include housing market policies that facilitate residential mobility, the promotion of adult and lifelong learning, and employment protection legislation that does not impose too heavy or unpredictable costs on hiring and firing. These policies can underpin the growth of productive firms, partly via lower skill mismatch.
  • More public investment in basic research, to support the continued emergence of breakthrough innovations and knowledge diffusion.
  • Innovation policies that ensure a level playing field between incumbents and new entrants, which is often missing in existing incentive schemes. R&D tax incentives should be equally accessible and beneficial to incumbent, young firms and start-ups.

 

The research into The Future of Productivity is part of the OECD's New Approaches to Economic Challenges (NAEC) project, an Organisation-wide reflection on the roots and lessons to be learned from the global economic crisis, as well as an exercise to review and update its analytical frameworks.

 

For further information on The Future of Productivity, contact the OECD Media Office (+33 1 4524 9700).

 

 

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