Labour productivity amidst global uncertainties: Insights from 2022-23

In 2022, the economic environment deteriorated, with challenges associated with the aftermath of the pandemic compounded by emerging hurdles and rising global uncertainties. Russia’s aggression against Ukraine led to a widespread energy crisis. Globalisation showed signs of stalling, with global FDI flows falling by 12% in 2022, reflecting deteriorating economic and business conditions. Inflation in 2022 reached record levels, potentially deterring investment and hampering productivity growth by increasing firms’ operating costs and disrupting long-term planning. Labour markets were tight and the number of bankruptcies rose markedly during 2022, while firm entries remained flat.

The 2024 edition of the OECD Compendium of Productivity Indicators takes a closer look at how productivity and related indicators evolved under these conditions in 2022 and how this environment affected longer-term productivity trends.

Labour productivity growth, measured as GDP per hour worked, was negative in the OECD in 2022. While the OECD and euro area had already experienced similar negative growth rates in 2021, the United States registered a large drop in productivity growth in 2022 (Figure 1).

Average figures conceal cross-country differences in labour productivity performance: in fact, growth was positive in about half of OECD countries, and negative in the other half, with varying magnitudes. Turning to labour productivity measured as GDP per hour worked in purchasing power parity (PPP) terms, the OECD average reached USD 67.5 per hour in 2022. There are also large variations across countries: labour productivity was more than twice the OECD average in Ireland and Norway, and about one third of the OECD average in Mexico and Colombia. However, in the former group of countries, multinationals and income transfers play a significant role, and this may distort the GDP per hour worked comparison. Over last two decades, labour productivity levels have converged across OECD countries, as many economies with below-average productivity levels in 2000 have significantly narrowed this gap since then.

The main contributor to labour productivity growth in 2022, both positive and negative, was multifactor productivity (MFP) in most countries, but Israel, Canada and Sweden (Figure 2). The growth of multifactor productivity itself slowed in most OECD countries with data or was even negative in many of them in 2022, with the United States registering a similar MFP growth drop as in labour productivity.

The capital-to-output ratio contributed to labour productivity growth to a smaller extent, with a negative impact in most countries (Figure 2). This reflected higher real interest rates and energy prices, as well as declining confidence. The resulting increase in the user cost of capital then helped discourage private sector investment. However, capital quality, i.e. the change in the composition of capital stock, provided a small but positive contribution to labour productivity growth in 2022.

In ‘normal’ times, the reallocation of hours worked between industries (i.e. the reallocation effect) tends to play only a limited role in explaining aggregate labour productivity growth. However, during periods of large economic shock, like the global pandemic, this effect can become relatively more important. New data for 2022 indicates a return to ‘normality’, with developments within industries regaining their significance compared to reallocations.

Industries most severely impacted by the pandemic, like hospitality or personal services, gradually recovered, albeit at varying paces across countries. This resurgence, however, has mechanically lowered labour productivity growth, as the influx of new hires is often associated with low-skilled workers and less productive activities (Garnier, 2023¹; Jobs and Skills Australia, 2023²). In some countries, however, hospitality and personal services recorded an uptick in labour productivity growth, potentially due to ongoing digital transformation and the related productivity gains.

Beyond 2022, the productivity outlook is clouded with uncertainty as past shocks such as the pandemic, as well as ongoing ones, like rising geopolitical tensions, may have scarring effects. This is layered atop longer-term trends that may have both positive or negative impact on productivity, such as ageing, digitalisation, and green transition. However, timely analysis and policy design is often difficult, with official labour productivity data generally coming with one to two year lag. To fill in this gap, the OECD has derived experimental estimates, utilising a range of machine learning models, to shed light on labour productivity performance in 2023 for 38 OECD countries.

Overall, labour productivity growth across most OECD countries in 2023 is expected to be modest, with an average growth rate of approximately 1.4%, mirroring the long-term average from 2001 to 2019. At a regional level, labour productivity is estimated to grow by 1.5% in Europe and 1.8% in Asia. However, these estimates should be treated with some caution as they are surrounded by large confidence bounds (Figure 3).

Looking forward, uncertainties surrounding economic growth and productivity do not seem to lessen. Geopolitical tensions could lead to continued energy disruptions while putting further pressure on supply chains, inflation, and financial conditions. The outlook for global trade, which is important for productivity growth, also remains uncertain. Furthermore, substantial debt burdens and rising borrowing cost are constraining governments’ capacity to address ongoing pressing issues, such as the green and digital transitions. These multifaceted challenges loom over future economic prospects, potentially dampening incentives for investment in technologies which, in turn, play a key role in shaping the forthcoming development of labour productivity.

1. Garnier, O. (2023). Une mesure de l’efficacité dans l’utilisation des ressources en main d’oeuvre : au-delà de la productivité. Banque de France.
2. Jobs and Skills Australia. (2023). Skills Shortage Quarterly. Australian Government. Retrieved 11 January 2024, from https://www.jobsandskills.gov.au/publications/skills-shortage-quarterly-march-2023