Conclusion and policy implications

386 C H A P T E R 6 G L O B A L P R O D U C T I V I T Y

This chapter offers several novel findings. First, long-term, “technological” drivers of productivity have accounted for a considerable portion of labor productivity variation since 1980: for about 40 percent of the 1-year-ahead forecast error variance of labor productivity and 60-75 percent of the 5- to 10-year-ahead forecast error variance. Second, employment has typically fallen, at least initially, after technology-driven productivity improvements. These employment losses were larger but less persistent in advanced economies than in EMDEs. Third, although demand shocks may unwind faster than technology shocks, their impact on productivity can be long-lasting. These findings point to two policy priorities.

Although technological progress is generally beneficial in the long term, it may initially be disruptive to employment (Arntz, Gregory, and Zierahn 2016; Autor 2015; World Bank 2019). The appropriate policy response is three-pronged: first, policies to encourage and support the training and retraining of workers to equip them with the skills required by new technologies; second, policies to mitigate the negative effects on transitioning workers; and, third, demand management to maintain full employment. The COVID-19 pandemic and resulting global recession may trigger another wave of restructuring and technological innovation, as firms adjust to social distancing and new restrictions on doing business or search for efficiency savings to remain competitive. EMDEs, in particular, will need to ensure that workers are equipped with skills to complement new technologies, rather than be replaced by them (World Bank 2018a).

Universities, vocational training facilities, on-the-job training, and continued learning are often underprovided in many EMDEs, and there are potentially high social returns to their expansion. Many EMDEs also need to make improvements at earlier stages of education in order to build a foundation for the more advanced education that will enable workers to adapt to skill requirements associated with new technologies (World Bank 2018a, 2019). Adequate social protection can help those displaced by technological change to transition into new industries. For example, in LICs, fewer than 20 percent of workers are covered by social insurance, in part because of large informal sectors in these economies (World Bank 2019). Encouraging private savings, including through initiatives that expand financial inclusion, and expanding unemployment insurance programs in the formal and informal sectors can strengthen the safety net.

The lasting productivity damage that even short-term demand shocks can cause calls for room to allow active deployment of fiscal and monetary policy to support activity. This will require the shoring up of fiscal positions once economic recovery from the pandemic is well established, a strengthening of monetary and fiscal policy frameworks, and effective supervision and regulation to ensure a resilient financial system (chapter 1; Kose et al. 2020). For commodity exporters, the creation or expansion of sovereign wealth funds, as well as better prioritization of spending, could help avoid procyclical spending in response to commodity price fluctuations (Mohaddes and Raissi 2017).