Labour markets, human capital and inequality

Economic Survey of Denmark 2009: Why has productivity growth declined?

 

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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Denmark  published on 5 November 2009.

 

Contents

 

Why has Danish productivity growth slowed?

Labour productivity, or GDP per hour worked, has decelerated markedly since the early 1990s. While this trend is also evident in a number of other OECD countries, productivity growth in Denmark is now lower than in many comparable countries. This has put a brake on the process of catching up to the GDP per capita levels of the leading economies. While some industries have bucked the trend, the slowdown is evident across much of the economy. Furthermore, the large size of the public sector, where measured productivity growth is nil for statistical reasons, cannot explain the slowdown. 

Labour productivity growth in Denmark has slowed to well below that in other OECD countries¹

 

1. The growth of GDP per hour worked has been smoothed using a HP filter (lambda=100) and the series shown are the annual growth rates of the smoothed series.
Source: Statistics Denmark National Accounts, Tables NAT02 and NAT18 and OECD Productivity Database.

Wider inclusion in the labour market is part of the explanation

The slowdown in labour productivity has coincided with a trend rise in employment and, to a lesser extent, hours worked. These developments may be related. It takes time for the stock of capital to adjust to higher labour supply. In addition, newly-employed workers might have lower human capital than existing employees. The overall skill level of the Danish workforce has been growing more slowly over the past decade. Even highly-skilled people who have recently moved into the workforce may take time to attain the productivity levels of their colleagues. The slowdown in the contribution to growth from capital deepening seems consistent with a lagged adjustment to higher employment. However, these factors probably explain less than half of the observed slowdown in labour productivity growth.

The remaining portion of the productivity slowdown is harder to explain. This is particularly true since the policy factors that are thought to underpin strong productivity growth are generally sound in Denmark. Furthermore, policy changes have moved in the direction of higher productivity, rather than working against it. Still, the expected slowdown in potential output calls for renewed focus on policies to lift Denmark’s productivity performance and ought to be a key focus of the government’s recently launched Growth Forum.

While policies are supportive of productivity, more can and is being done

Measures can be and are being taken in a number of policy areas to boost productivity growth. The planned increases in infrastructure investment might add to potential growth in the medium term and, as they have been frontloaded, they will help pull the economy out of recession. The recent income tax reforms, which cut marginal tax rates for all income levels, should encourage greater efforts to develop human capital and might make it easier for Denmark to attract and retain talented foreign workers. It is important that these reforms are not reversed. More efficient processing of immigration applications could boost the pool of potential new entrepreneurs. In addition, targeting of entrepreneurship support should attempt to capture all high-growth-potential firms, regardless of their age. Entrepreneurship education needs continued attention, particularly in ensuring that students get experience in work as well as time to develop their own business ideas. Finally, while product market regulation is relatively liberal, further reforms could boost the economy’s flexibility. OECD product market regulation indicators suggest the need for measures in licensing procedures, planning of retail outlets and access in the legal services industry.

Growth in the capital stock in key infrastructure sectors has declined
Annual percentage change in the real net capital stock

Source: Statistics Denmark National Accounts, Tables NAT08 and NAT09.

How to obtain this publication

 

The complete edition of the Economic Survey of Denmark is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

 

Additional information

For further information please contact the Denmark Desk at the OECD Economics Department at eco.survey@oecd.org

The OECD Secretariat's report was prepared by Stéphanie Jamet, Peter Welz and Niels-Jakob Harbo Hansen under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.

 

 

 

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