Evidence of technological change, led by advances in digital technologies, is all around us. One must only bear witness to the increasing sophistication of cell phones and computer systems; digital platforms transforming information and communication; and expanding uses of robotics and artificial intelligence. Technology is a key engine of productivity growth, allowing humans to achieve higher levels of efficiency. How is it then, one might ask, that productivity growth has been slowing in major economies in the past few decades, just as these technologies boomed? What explains this apparent paradox?
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In examining what the data shows, aggregate productivity growth in most major economies has slowed. The declining long-term trend in productivity growth since the 1980s is evident. Some economies experienced a rebound in productivity growth in the 1990s and early 2000s, which was principally a reflection from the adoption of digital innovations, where the United States was notably the leader. However, the rebound proved to be short-lived and productivity growth slumped again, and the global financial crisis accentuated the slowdown. Although a cyclical element to the post-crisis deceleration of productivity growth can be observed, the productivity slowdown predates the crisis. The declining longer-term trend suggests that there are deeper, structural factors at play, which may have adversely affected the underlying rate of productivity growth.
Analysis of the productivity dynamics at the firm level provides further important insights. Productivity growth has generally slowed down––except in the leading technological firms. Gains have decelerated considerably in the vast majority of the smaller firms, pulling the aggregate productivity rate lower.
The implication of this pattern can be summed up by the following: the problem may not be the technology itself, but rather its lack of penetration. It is not so much that innovation has weakened greatly, but that barriers are limiting productivity gains and preventing a broader diffusion of innovations across firms. The widening gaps in productivity performance between firms go some way in explaining the paradox of slowing aggregate productivity growth amid advancing technology.
One view on the productivity paradox that has gained some traction is the notion that it may be illusory. Productivity is underestimated––the argument states––because statistics fail to fully capture the true extent of the gains from the new technologies. The statistical data disregard the improvements in product quality, variety, and provision of goods and services that are valuable to consumers but do not carry a market price (such as Google searches). However, research finds that although gains from new technologies are underestimated, this mismeasurement can only explain a relatively small part of the slowdown in economic gains. For the most part, the productivity slowdown, and the ensuing paradox, are real.
Concurrently, with productivity growth rates decreasing, income inequality has been rising in most major economies. Recent research on the possible linkages between the slowdown in productivity and the rise in inequality finds that they are interconnected, with important common drivers that call for an integrated approach to formulating a policy agenda.
One key area for attention is revitalizing competition. Regulatory reform should aim at both removing regulations that impede competition, and ensuring that adequate rules and regulations are in place to prevent abuse of market power.
A second area of focus should be the reform of technology policies, in order to spur innovation and promote its spread across more economies. Intellectual property regimes need to be better balanced so that they reward innovation but also foster wider economic impacts. Public investment in R&D needs to be increased. Creating a new balance of shared risks and rewards in public research investment would be in direct contrast to the current paradigm, in which risks are socialized, but rewards are privatized.
The third area of improvement concerns investment in skills. Advances in digitization, robotics, and artificial intelligence have led some to draw up dire scenarios of massive job losses from automation. The main issue is that the nature of work is changing, and the main challenge lies in equipping workers with the higher-level skills demanded by the new technologies and supporting them during the adjustment process.
A fourth area, is revamping labor market policies and social protection. Labor market institutions and social protection arrangements need to adapt to a changing world of work; a new model characterized by more frequent shifts between jobs and more people working independently.
Advancements in digital technologies hold much promise. To achieve better outcomes on productivity and equity, policies need to rise to the challenges of the digital age. A better tomorrow can be created by revitalizing competition, spurring innovation at the technological frontier, upskilling and reskilling workers, and reforming social contracts. The challenges are enormous, and the political economy of reform is difficult. Fortunately, the policy options are not limited to a binary choice between productivity and equity. There are policies that can promote both, and policymakers should approach them through an integrated agenda of reforms.