Chapter 1. Recent trends in productivity, employment and wages
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
Labour productivity growth remains weak
Labour productivity growth in the OECD area remains weak and well below pre-crisis rates. Since 2010, annual growth in labour productivity has slowed to 0.9%, about half the rate recorded in the 2000-2005 pre-crisis period (Figure 1.1). Post-crisis labour productivity growth has also slowed in countries with relatively low labour productivity levels (Figure 2.7), undermining the pace of convergence towards higher labour productivity levels. A similar picture emerges for emerging economies, in particular in Brazil, the Russian Federation and South Africa (Figure 1.2), who have fallen further behind the productivity frontier as productivity has contracted in recent years.
The post-crisis slowdown in productivity growth affects all major sectors, but particularly manufacturing where productivity growth rates remain well below last-decade’s rates in most countries (Figure 1.3). Indeed, in Australia, Israel, the United Kingdom and the United States, productivity gains in manufacturing have been negligible since 2010. In Ireland, the relocation of firms with significant intellectual property assets and aircraft leasing companies, led to a significant increase in labour productivity in 2015.
In the services sector, the picture has been more varied (Figure 1.4). In Central and Eastern European OECD economies, for example, the catch-up process has helped sustain relatively robust growth, picking up strongly in Poland and Slovenia in the most recent years. However, productivity growth remains weak in most other economies, indeed sclerotic in some, such as Italy and Greece. Even in countries where it has improved in recent years, such as the United States, it remains weak.
Multifactor productivity growth remains below pre-crisis rates
Like labour productivity growth, multifactor productivity growth also remains weak across most OECD economies, and although some countries, including the United Kingdom and the United States, have seen a pick-up in recent years, growth remains well below pre-crisis rates (Figure 1.5). Multifactor productivity growth has also improved in Italy, Portugal and Spain, outpacing pre-crisis rates, but it remains weak.
Employment rates have climbed to historic highs
Weak productivity growth restricts the potential for economic growth and improvements in living standards. Unlike in the pre-crisis period, where productivity was the main driver of economic growth, since 2010, contributions from labour utilisation, i.e. hours worked per head of population, have been the main driver of growth in GDP per capita in many countries (Figure 1.6), with the contributions increasing significantly in nearly all countries. In Italy, New Zealand and Portugal, and to a lesser extent the Netherlands and Spain, GDP per capita growth was almost entirely driven by labour utilisation.
Post-crisis increases in labour utilisation have been largely driven by increasing employment almost across the board (Figure 1.7), with employment rates climbing to historic highs in most countries (Figure 1.8) (OECD, 2018b). However, demographic changes, in particular population ageing, limit the potential for labour utilisation to act as a sustainable source of economic growth (OECD, 2017).
Changes in average hours worked per person have contributed less to the pick-up in labour utilisation in recent years but of note is the fact that the long-term decline in average hours worked has begun to stabilise in many countries and reverse in some, such as the United Kingdom and the United States (Figure 1.9).
Historically, comparisons of productivity across countries have shown substantial gaps, even between similar-sized economies at a similar stage of development. However, a new OECD study (Ward et al., 2018) reveals smaller gaps when differences in how countries measure labour input, and in particular, average hours worked are accounted for.
In the national accounts framework, for productivity measures, labour input is most appropriately defined by the total number of hours actually worked by all persons engaged in production, i.e. employees and self-employed (OECD, 2001). Hours worked include all hours effectively used in production, whether paid or not, but they exclude hours not used in production (e.g. annual and sickness leave), even if some compensation is received for them. In practice, countries adopt one of two methods to estimate average hours worked for productivity estimates:
-
the direct method, which takes actual hours worked self-reported by respondents in surveys, generally labour force surveys (LFS); and
-
the component method, which starts from contractual, paid or usual hours per week from establishment surveys, administrative sources or, indeed, the LFS, with adjustments for absences (e.g. public holidays, annual, sickness and maternity leave) and paid and unpaid overtime and indeed other adjustments that are necessary to align with concepts of output in the national accounts, for example concerning cross-border workers.
While the “direct” approach appeals due to its simplicity, it depends heavily on respondent recall, cannot account for respondents’ self-reporting bias, and, moreover, assumes a perfect alignment of workers and measures of output. The component approach is more complex, but it systematically attempts to address these issues. To give some sense of the potential impact of these different approaches on the international comparability of hours worked, the OECD has used the LFS and complementary sources to estimate national hours worked using both a direct approach and a simplified component method.
The results provide strong evidence that response bias and a lack of exhaustive adjustments to align with the underlying conceptual production boundary, lead to systematic upward biases in estimates based on the direct method, which are, in turn, always higher than those compiled using the simplified component approach. Figure 1.10 compares official estimates of hours worked in countries’ national accounts with the OECD simplified component method estimates for those countries that currently use a direct method and make minimal or no additional adjustments.
The corollary of an over-estimation of hours worked is an under-estimation of labour productivity levels. Figure 1.11 below presents the impact of the adjustments shown in Figure 1.10 above on labour productivity levels, referenced to the United States. Overall, the results point to a reduction in relative productivity gaps of around 10 percentage points compared with current official estimates in many countries.
While the results reveal biases in international comparisons of productivity levels, it does not follow that the same holds for international comparisons of productivity growth rates; growth rate estimates would only be distorted if the impact of the adjustments had significantly and disproportionally changed over time. Indeed, implementing the simple component approach reveals no systematic bias in growth rates.
Minor differences do occur however, and, so, to avoid introducing differences with national estimates of productivity growth (and those that can be derived from the countries’ national accounts data), the OECD has taken estimates of average hours actually worked (levels) using the simplified component method in 2016 as a benchmark, and projected series forwards and backwards using official (national) growth rates.
At this stage, based on the data available to the OECD, the implementation of the simplified component method has been applied to the following countries: Austria, Estonia, Finland, Greece, Latvia, Lithuania, Poland, Portugal, Sweden and the United Kingdom. These changes have been incorporated into the OECD Productivity Statistics (database) and the OECD Average annual hours actually worked per worker dataset as of the end of January 2019, along with corresponding metadata, and are now incorporated in the labour productivity levels available in this publication.
Most new jobs have been created in low productivity and low paid activities
Compounding the impact of weak productivity growth on material well-being, is the fact that in most OECD economies most jobs have been created in lower labour productivity activities, weighing down, in turn, on overall labour productivity levels (Table 1.1) (OECD, 2018a). Some countries, such as Belgium, Finland, Italy and Spain, have even seen net job destruction in industries with above average labour productivity levels.
In many OECD economies the three sectors generating the largest employment gains between 2010 and 2017 had below average labour productivity, with accommodation and food, and health and residential care activities featuring highly in many economies (Table 1.2). In Belgium, Canada, Italy, Portugal and Sweden, the top three sectors, all with below average labour productivity in 2010, accounted for 40% of total employment creation in the economy between 2010 and 2017, while in the Netherlands, this share was close to 55%. Only a few countries, such as Czech Republic and Poland, had a single sector with above average labour productivity among the three activities with the largest net employment creation. On the other hand, most economies had at least one sector with above average labour productivity among the top three sectors that lost most jobs over the same period; two sectors in the case of Germany and the United Kingdom, and all three in the case of Sweden and the United States (Table 1.3).
Since labour compensation levels typically correlate highly with labour productivity levels, more jobs in low labour productivity activities has also meant more jobs with below average wages in most economies (Table 1.1), weighing down on average salaries in the economy as a whole. For example, the top three sectors with the largest employment gains between 2010 and 2017 in France, Germany and the United Kingdom accounted for one third of total employment creation and paid below average wages (Table 1.2). Similarly, in most countries, in at least one of the top three sectors showing the largest job destruction, wages were above total economy’s average; all three in Sweden and the United States (Table 1.3). However, in some countries, one or more of the top three sectors with the largest employment gains had above average productivity and above average wages, as was the case for example of computer programming, related consultancy activities and other information services in Poland and Spain.
Wage growth has recovered in many countries but remains below pre-crisis rates in most countries
The sharp increase in unemployment rates at the height of the crisis was followed by a significant slowdown in wage growth in many countries (OECD, 2018b). While unemployment rates are now below, or close to, pre-crisis levels in many countries – with record lows in some - wage growth remains sluggish. Growth in real wages, adjusted for inflation (using the consumer price index), has improved almost across the board in recent years compared with the early recovery period, but remains below pre-crisis rates in two thirds of OECD countries (Figure 1.12). In many countries, e.g. Ireland, Portugal, and the United Kingdom, recent growth in real wages has come on the back of declines in purchasing power in the years following the crisis. However, in many other countries, real wages have barely increased (e.g. Finland, the Netherlands) or even declined (e.g. Canada, Belgium) in recent years.
Sluggish wage growth is in part a function of slowing productivity growth (OECD, 2018b), but in many countries there are signs that the post-crisis decoupling of wage and productivity growth is beginning to unwind (Figure 1.13) (OECD, 2017; OECD, 2018a), in particular in those economies where employment rates are high.
Recent increases in wages may in turn help to boost productivity growth. In some economies, such as Canada, the United Kingdom and the United States, slack in the labour market appears to have allowed firms to defer investment decisions (Figure 1.14) and instead meet increased demand through higher (including temporary) labour utilisation, especially with labour costs lagging investment costs (Figure 1.15). With labour costs beginning to rise in many countries, however, firms may begin to reconsider investment decisions, but political uncertainties, trade tensions and the erosion of business and consumer confidence (OECD, 2019a), may continue to weigh down on the recovery in investment (Figure 1.14) and productivity growth.
Conclusions
Ten years after the global financial crisis productivity growth remains weak in most economies. Economic growth over this period has been sustained by job creation, but with employment rates climbing to historic highs in many economies the contribution from higher employment will inevitably begin to wane. Higher employment rates appear, at least in part, to be a post-crisis effect. The slack in labour markets and downward pressure on wages may have allowed firms to defer investment decisions and instead increase employment, undermining, in turn, the potential for investment driven productivity growth. The fact that most of these new jobs have been in activities with relatively low productivity and low wages has compounded the impact of lower investment. With labour costs beginning to rise in many countries, firms may begin to reconsider investment decisions, but political uncertainties, trade tensions and the erosion of business and consumer confidence may continue to weigh down on investment. As higher employment cannot be an indefinite source of growth, policies to kick-start the investment engine, to capitalise on mega-trends such as efficiencies and economies of scale provided by the digital transformation, or to stimulate growth in higher productivity activities, are essential (OECD, 2019a; OECD, 2019c).
References
OECD (2019a), Going Digital: Shaping Policies, Improving Lives, OECD Publishing, Paris, https://doi.org/10.1787/9789264312012-en.
OECD (2019b), OECD Economic Outlook, Interim Report March 2019, OECD Publishing, Paris, https://doi.org/10.1787/69e962c6-en.
OECD (2019c), OECD SME and Entrepreneurship Outlook, OECD Publishing, Paris, forthcoming.
OECD (2018a), OECD Compendium of Productivity Indicators 2018, OECD Publishing, Paris, https://doi.org/10.1787/pdtvy-2018-en.
OECD (2018b), OECD Employment Outlook 2018, OECD Publishing, Paris, https://doi.org/10.1787/empl_outlook-2018-en.
OECD (2017), OECD Compendium of Productivity Indicators 2018, OECD Publishing, Paris, https://doi.org/10.1787/pdtvy-2017-en.
OECD (2001), Measuring Productivity – OECD Manual: Measurement of Aggregate and Industry-level Productivity Growth, OECD Publishing, Paris, https://doi.org/10.1787/9789264194519-en.
Ward, A., M. Zinni and P. Marianna (2018), “International productivity gaps: Are labour input measures comparable?”, OECD Statistics Working Papers, No. 2018/12, OECD Publishing, Paris, https://doi.org/10.1787/5b43c728-en.