GLOBAL PRODUCTIVITY
CHAPTER 1
57
Sources of the slowdown in labor productivity growth after the GFC Aggregate labor productivity growth can be decomposed into (1) factor inputs and the efficiency of their use, or (2) sectoral contributions. These decompositions help to diagnose the sources of the post-GFC productivity growth slowdown in EMDEs.
Factor inputs and the efficiency of their use Approach. In the first step, productivity growth is decomposed into contributions from individual factor inputs (physical capital and human capital) and the effectiveness of their use (total factor productivity), assuming a Cobb-Douglas production function (box 1.1). Capital deepening directly increases labor productivity, while human capital improvements (for example, education and training) enhance the quality of labor input and therefore the resulting quantity of output produced. TFP measures the efficiency with which all factors are employed and is often considered a proxy for the technology behind the production process.6 Factor inputs vs. the effectiveness of their use. Globally, the post-GFC (2013-18) slowdown in labor productivity growth from pre-GFC (2003-07/08) averages amounted to half of a percentage point, the majority of which was a result of a slowdown in capital accumulation (both public and private; World Bank 2019b; figure 1.3). In advanced economies, TFP contributed only marginally to the decline in labor productivity growth after the GFC, in part due to a structural slowdown before the GFC.7 In EMDEs, however, it accounted for about one-half of the slowdown in labor productivity growth. •
Advanced economies. Investment weakness accounted for virtually all of the slowdown (0.7 percentage point) in productivity growth from pre-GFC averages in advanced economies. From 2008, investment growth slowed sharply in response to weak and highly uncertain growth prospects, heightened policy uncertainty, and credit constraints in the aftermath of the GFC (see Duval, Hong, and Timmer 2017; Ollivaud, Guillemette, and Turner 2016). Investment contracted by an average of 6 percent per year between 2008 and 2009. Although investment growth has recovered close to pre-GFC rates, it has been accompanied by strong rates of employment growth, such that the growth of capital per worker has remained subdued (ECB 2017). TFP growth had already declined in the 1990s and pre-GFC
6 The decomposition above is an accounting framework that does not control for dynamic interactions between TFP and investment growth. However, there is evidence that weak underlying TFP and investment growth reinforce each other, which could have amplified the postcrisis productivity slowdown. 7 The finding of a longer-running decline in TFP growth is largely due to a long-run decline in Europe. In the United States, TFP growth enjoyed a brief resurgence due to the ICT boom during 1996-2004 (Adler et al. 2017; Fernald et al. 2017).
