MSc in International Management

«Global Scenarios: Module 1 (Macroeconomics)»

Lecture 5
The Slowdown in Productivity Growth
 Slowdown in productivity
key element to have growth over long run , especially in

• productivity growth: mature eco close to steady statet meaning they have exploited all
gains from accumulation capital

– key factor in raising living standards in advanced

economies

BUT
 Slowdown in productivity: world
amount produced per worker not complete concept but easier to measure

productivt growth has been slowing down over time more evident
in advanced economies of course
what is sttriking is that in last 10-15 years we observe a reduction in
labor porductivty growht

we can also look at total factor productivity growth

… particularly in the euro area …

Source: ECB, “The slowdown in euro area productivity in a global context”, ECB Economic Bulletin, Issue 3/2017
 Labor productivity and TFP
for developed economies
reduction in labor product and TPF

very strong in italy negative TFP growth

Emily Moss, Ryan Nunn, and Jay Shambaugh, “The Slowdown in Productivity Growth and Policies That Can Restore It“, June
2020, Hamilton Project at Brookings
https://www.hamiltonproject.org/assets/files/Productivity_Framing_LO_6.16_FINAL.pdf
 Slowdown in productivity

introduce policies to revive roductivity in terms

manaement and policies
problem is more fundamental

Cyclical factors OR Structural drivers

• Decline in
– Is it a legacy of technological
the crisis? progress
of the great recession of 2009 • Measurement issues
• Decline in diffusion
of innovation
– Winner takes all
dynamics
– Misallocation
A LEGACY OF THE CRISIS?
 Lower K investment during the crisis

crisis in 2009 slowdown in accumulation of capital in developed countries (its common, u have less
incentives to invest in innov but also factor of producton K)

Source: UN (2018), World Economic Situation and Prospects 2018, UN, New York, https://doi.org/10.18356/02486bd4-en.
Declining productivity: a legacy of the crisis?
for sure crisis played a role, also pandemic crisis generated more uncertainty

• Stagnating capital investment probl cause accumulation k factor prod

driver eco growth

→ decline in the adoption of capital-embodied

technologies introduction new capital units can facilitte the introduction of new technologies and
so productivity
→ lower productivity
• Crisis:
– Low demand firms struggle in investing in k and innovation (lower revenue mor ehard to finance
accumularion capital, creation new ideas)
– Austerity policies especilaly in euro area zone after great r sovreign debt crisis , reaction gov
= contractionary fiscal policies, depressed demand even more
– Fragile banks’ balance sheets having access to fund crucial for innovation
– Credit constraints of small, new, generally more
created credit crucnh period borowing funds was difficult
productive firms
and costly limited ability firms investing even those with long run perspective with desire
to invest
– Uncertainty more idfficult make plans in future, more risky
comes after great moderation (decades in which we got perception lower volatility compared to past, perceive more
stability and lower uncertaintu) with great recession we realized it was an illusion
Total Factor Productivity
graph about europe , but slowdown in productivity started before great recession

started in europe from the 80 so even if crisis played a role

there must be more fundamntal caudes in slowdown of productivty

not only in italy even in germany

dotcom reboudn product

but trend is negative
Declining productivity: a legacy of the crisis?

• The crisis had an impact

• But, productivity growth started its decline well
before the crisis
Structural, long-term factors!!!
– Slowing pace of innovation slowing down in our ability to introduce innovation

• Measurement error? maybe innovation we introduce ar less disruptive than those inthe past

– Decline in diffusion/adoption of technologies

champion firms frontier firms able innovate
• Misallocation of resources increase product growh
and others left behind so at country levl produc
growth slows dow
– Demographic change (see Lecture 7)
structural shock
–… debate techno pessimist-techno optimist
SHIFTING IN THE INDUSTRY MIX
countries developed ones especially moved from manufact to service sector
and it is easier to improve producvitivy in manufacturing with ibtrouction new machiens
make workers more productive

while true services more intensive users of ICT technology communication capital that can
raise product, in service sector we have lot of labor intensive activity
more difficult to increase productivity in labor intensive activities
 no system to speed up process

Shifting Industry Mix

ex hairdresser (labor intensive) -cut hair its difficult ot improve hairdresser productivity cause nb cuts per day
always the same more or less

• From manufacturing to services

– Higher productivity growth in manufacturing
– Services major consumer of innovations in IT
developed eco moved out of manu to service (UK)
• If true: we should observe

– Lower average productivity growth at country level observe slowdown

when look at manuf and services we should find
– Quite stable productivity growth at industry level
just shift manufacturinf with higher productivity growth toward serv
• Evidence:
whilwe we observe first fact that at coubtry level we observe reduction in productivt growth combined
to shifting toward services
– decline in productivity growth is mainly due to a
within-sector decline
when we lok at manufact and service observe reduction in productivity growth within the industry
even if shifin in industy mix plays role this is not full story even within manufacturing we observe reductin in prod
growth
DECELERATION IN THE RATE OF
TECHNOLOGICAL PROGRESS
 Discussion

Are ideas getting harder to find?

reviews economic paper about the decline in product growth in which author analyzed effort in rd and the outcome product
growth, creation new ideas

Izabella Kaminska, “It’s not about the low hanging fruit,

it’s about the ideas”, Financial Times, Sept 13, 2017
 we observe producitty growth but we get this by increasing more than proportionally
not optimistci picture
the effor

Research Productivity in the US we are less able than in past developing

new idea and we can do that by incrrasing
in paper measure productivity growht total fact productivity
our effort more than proportionally
we have already picked low
hanging fruit now we have to reach the ones
above its more difficult get new ideas harder
than before
correct for full time, level education
evolution TFP growth over time
reduction in product growth - Aggregate macro
productivity growth (result of innovation) effort in innovation not meas in terms data as in this graph
compared with efort put in innovation expenditre but in term researche
- Specific case study
industries
its not the level its the growth (semiconductor,
we do have productivity crops, medicines)
- Microdata
(compustat)
in face of increase effort we have decrease in outcome firm level data

we have progress but this put more proportional increase in effot

Bloom, N, C Jones, J Van Reenen, and M Webb (2017), “Are Ideas Getting Harder to Find?” NBER
Working Paper w23782
 robtrt gordon techno pessimistic

Triadic Patent Families, total, 1985-2019

slowdown in patents may be another sign that story that we picked up low hanging fuit may be true
20000 70000
18000
60000
16000
14000 50000
12000 40000
10000
8000 30000

6000 20000
4000
10000
2000
0 0

USA CHN EU27_2020 OECD (right scale)

Triadic patent families are a set of patents filed at three of these major patent offices: the European
Patent Office (EPO), the Japan Patent Office (JPO) and the United States Patent and Trademark Office
(USPTO) https://data.oecd.org/rd/triadic-patent-families.htm#indicator-chart
what is disruptive.something increase product growth (intro electricity-factory change ) something changes life radically

A decline in the rate of technical progress?

compared 3 waves industrial revol beg 19 century with intro steam power, 2nd industrial rev from sedond part 19-first dec 20
with intro of electr, internal cobuison engine, running water sewage, 1960 3rd industil peeked in 90s ICT
innova we able to develop now as not as revolutionary as the ones we have developed in past (electricity was disruptive)
qe are not able to introudce new idea as disruptive as electricity
Techno-pessimists Techno-optimists
we dont have diminishing marginal return and we are able to develop them
• Less revolutionary • Ideas are non-rival!
innovations compared to – Still a lot of potential
it is true we have lower nb i terms paptent
the past (Gordon) • Lower high-tech patents
– Electricity, railway… submitted but high by
paper cited in financial times article
• Stronger slowdown in historical standards
industries producing or • Mismeasurement!
and patents are not good measure of output of innovation
intensively using ICT they say its a matter of time and maybe we have slowdown
product bc no longer able to measure productivity growth

– The end of an era? this productiviy growth slowdown is back to nirmal

gordon says probl is not priduct growth is slow now the point is that after 2nd ind rev we have period exc3ptionally hgih prod growth
now we are back to normal , growth is something recent in hist of economics (before ind rev we had no growth no impr in product

not only we are not developing ideas as disruptive electr, therr are some forces that can limit even more our ability to innovate, among
those factors cites climate chnage, demographic change )
a fact reinforces this vie is that 3rd indusrtial rev started with computers in 60s ,
90s and it is already over , stronger slowdown in productiy growht
in those sectors producing or using intensibe communication technoogy impact of 3rd revolution is already over
 Measurement Issues
ex hairdresser (labor intensive) -cut hair its difficult ot improve hairdresser productivity cause nb cuts per day
always the same more or less , no system to imp

Robert Solow*: The productivity paradox!

in the 80s in middle 3rd industrial revolution introduction of computers he said

“You can see the computer age everywhere but in

the productivity statistics."
in 3rd ind rev observing impact of these technoogies we have prob of measurement

**Robert Solow, "We'd better watch out", New York Times Book Review, July 12, 1987, page 36
we are not able to see impact of innovation on productivity growth not bc not able to develop new ideas but because
it is diff to measure their impac tbc GPT it takes time to have truly useful applications, and specificallu of techno optimists
for ICT, AI this due to intangivle assets

Measurement Issues
we may have 2 types innovation; incremental and general purpose techno ( dont have direct application like electricity or internal
combusion engine ) and it takes time to obsrve impact on firm balanc sheet of GPT , u develop electricity but takes time
to understand how to apply them maybe complementary ideas have to be developed to undestand hwo to apply these broad technoligies
in production

• Underestimation of productivity growth

– General Purpose Technologies
– Intangible investments
to see impact on data of introduction of electriciy it too kone genration of mamagers to chane factories , complete revolution structure
factory and organiztion takes time, at beg dont know how to applym, then develop ideas on how to take adv of it we may have
cultural resistance
techno opt say its too early give evaluation of 3R INDUSTRIAL EVEN more difficult this time to measure impact of artificial intelligence
bc adption of these techno require investment in many intangivle asset (trainign worker ,changing culture in firm)
However
so firms wihth lot resourced (cap and labor) to develop intangible asset not visible on bs so when calculate product u see lower growth
in product byt just bc firms using some resourcrs to produce someting not visible in data (intang assets complementary to GP techno)
if we are patient in future we should see rebound and see increase in producvity
• Internationally synchronized slowdown
we observe slowdown in product growth in many countries not onl yin those that are in the frontier of the adoption of ICT
and AI if this measur error explains slow down in productivity ths impact should be bigger in countries adoptin faster those
– Across economies with different structures,
tecnologies

education levels, etc. etc. but we obsbere slowdown in countriws with diff rates adoption
these techoogies , and 2nd slowdon started before from the 80s
when peak of introd of ICT is in the 90s
– Well before the diffusion of internet
J curve: at beg we underestimate product then we have rebound

*Brynjolfsson, E, D Rock, and C Syverson (2021), “The Productivity J-Curve: How Intangibles Complement
General Purpose Technologies”, American Economic Journal: Macroeconomics.
 creation of new ideas is not linear might have sense that hard to find new ideas
until u find a new one

helpong firms in generating and adopting new ideas is imp

REDUCTION IN THE PACE OF

TECHNOLOGICAL DIFFUSION
2nd explanation in reduction productivity is reduction in diffusion techno
 Reduction in the pace of tech. diffusion
how can we measure diffusion or lag ; innovative firms at frontiern then we have firms imitate qhat innovstive firms do

• Lags in incorporating inventions into production

– Decline in technology diffusion

• Measure? of diffusion

chemicals, pharmaceuticals
– frontier firms vs. laggards
• Frontier firms: top 5% in productivity in their 2-digit
2 digit: classification system
industry in each year hierarchical
1 diit: large sectors (services, manufact)
• Laggard firms: the rest 2 digit within mnanu u can distinguish food, textilem automotive
of course based on indsutry bc productivity depends on industry in which operate

Andrews, D., Criscuolo C., and Gal P. N., “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the
Role of Public Policy”, OECD Productivity Working Papers, 2016-05, OECD Publishing, Paris.
 Technology diffusion: frontier vs laggard firms
Annual labor productivity

of course for frontier firms product is higher

interested in evolution over time
laggards in yellow and orange if we start at 1 in 2003 what happens over time
aggregation

evolution of lab productivy since 2003 gao between frontier firms and laggards increases both
manuf and services

frontier firms are progressing more than laggards -slowdown in diffusion of knowledge and diffusion

Source: ECB, “The slowdown in euro area productivity in a global context”, ECB Economic Bulletin, Issue 3/2017
 Frontier firms vs. laggard firms

Frontier firms in 24 OECD countries: evidence

frontier are more product 3 -4 times more than laggards rest of comp

• 3 – 4 times more productive on average

• Greater sales and more capital intensive than laggards

• Pay higher average wages better educated worforce

• Larger in terms of employment

• More likely to belong to a multinational group
• Patent more intensively
not only more proeudtive 2 groups differ in several dimension s, frontier are bigger , innovate more and diff with rest pop is getting
higher

problem not developing new ideas prob is ideas are not shared not used by rest pop of firms so product growth slows
down

Andrews, D., Criscuolo C., and Gal P. N., “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the
Role of Public Policy”, OECD Productivity Working Papers, 2016-05, OECD Publishing, Paris.
 Divergence

Why?
Lower business dynamism
• Two explanations proposed:
– “Winner takes all” dynamics favored by digitalization
– Misallocation related to ill funtioning of markets
 A «winner takes all» dynamics
problem of too low competition , concentration, the incubment can prosper and kills competitors
this reduces diffusion but also the ability to innovate (nuove firms non entrano proprio poche firm)maybe good startups with
innovativr ideas not
• Digitalization fqcilitates creation of barriers to entry

– Barriers to entry app developers must use apple -reinforces apple dominant position
if i am incumbet firm in industry characterized by use of ict i can take
– Economies of scale adv of positio nto kill my competirors, the fact i have goodpostion
cuts out of marekt poetneitl competirors
ex amazon :dominate market of online commerce
– Network effects string network eternalities,, barriers to entry repesented nb customers
more customers u have lower cost of providing service

logistic infrastructure allos u to be faster with better customer compared t

to competiro hard challenge position of incubment firm
even more trheu in industries where digitalization is imp bc setting standards

• Empirical observation: techno standards is crucial and havinf bunch o fucdtomer already help
firm keep dominat nposition

– Divergence in sales growing over time

• particularly stark in ICT-intensive compared to non-ICT
services incumbent position allows these firms to increase nb products or niches in which they are
active once u have bulk of customers bc u manage online commerce then u can propose
→ more concentration, less competition
to same customer to use same entertainment prdocuts

apple famous for buying startups to kill them remove competiros

read article the teclash is
 Lower Business Dynamism
connected to nature techni
technological reason for reduction in diffusion
refers to intangible assets needed to implement new techologies
barrier to entry= ability of developing those intangible assets
more difficult for smaller firms

• Tacit-knowledge and complexity

– ↑ sophistication of complementary investments
(intangible assets)
• Decrease in business dynamism
low birth rate
– Less entry of young and high-growth firms
– Misallocation of factors of production
increase diff product betwen frontier and laggards, also

Causes: frictions in labor, product and credit markets

 Lower Business Dynamism

nb birth and deaths among firms

we not happy when firms die but sometimes it is necessary

too low death rates can be perceived as negaive as a measure of stangation
while instead if observe new firms we think sign of dynamism

old should die ma non muoiono e nuovi firms

non nascono

we have evidence smaller bdynamism

one possib is winner take all dynamics another is inefficiency of markets that leads to misallocation

Source: ECB, “The slowdown in euro area productivity in a global context”, ECB Economic Bulletin, Issue 3/2017
 if makret work properly and ur productivty is low the amount u pay to my capital is low instead of invest in ur firm i invest in another firm
u reduce ur capital due to diminhisng marginla return ur return is higher or at limit u candie and leave the marekt
my capital would be there andmarginal product of capital would be them same , in real world we have some dispersion not al firms are
identica
Allocative efficiency
capital is key prdocution factor where is it going if market are well functioning if we have money to invest where are u investing ,
where u can get hiigher return for same risk, so if capital market work properlu if we have firms with low marginal produciity capital
that pay low rat capital and firms with high marg produc we should observe flow capital from less productive firm to more productive
Weighted averages of dispersion in the some firms might die

marginal product of capital across firms • With efficient

within sectors, 2002 =100
if dispersion increases, market not efficiency
allocation, flow of
capital towards firms
in which the marginal
some firms low marginal
product is higher
return to capital with respe other they are still there they are not loosing capital we dont have
misallocation
set standard deviation of productivity to 1
Low dispersion
(variation)!
except slovakia we have an increase

in equilibrium we should observe firms eith same return to capital

(same marginal priduct of capital) otherwise capital would flow from
in slovakia we have improvement less dispersion less productive to more productive -dispersion marginal productio
capital sould be low

evidence of inefficient allocation resources, we dont hae reallocation resources from less
prodcitve to more proutive firms
Source: ECB, “The slowdown in euro area productivity in a global context”, ECB Economic Bulletin, Issue 3/2017
 Zombie companies walk among us
presence zombie companies extreme example of misallocation
mmarkets not efficient in moving resources to best use can haoppen with labor and talent

should be dead, but theyre still alive, firms no longer able to generate value but theyre not leaving the market,
should either restructurr or die

•Tim Harford, “Zombie companies walk

among us”, Financial Times, Feb 23, 2018
 interest coverage ration below 1 or 3 consecutive years not even able to repay interest on debt,
no longer viable not able to genrate value but it is there

Fear the walking dead – zombie firms

some firms are zombies and tend to be quite large share capital, empl that is stucl there is larger than shar of
zombies on total number of firms
dots are above the bars

capit and employment not used at best value, they could be more productive if used in other firms

if market work properly when firm not abel generate value, or restructure the firm should exit
not just prbl for firm itself its a problem also for other firms
share of zombie firms the blue bars , they are increasing over time especialy during
pandemic
black dot : share employment zombie firms
white: share capital in zombie firms

italy zombie firm : alitalia was publicly supported, alitalia was dead in 80s alive
till last year, typically not supported by gov they are private

we are wasting resources used in those firms

Müge Adalet McGowan & Dan Andrews & Valentine Millot & Thorsten Beck Managing Editor, 2018. "The walking dead?
Zombie firms and productivity performance in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 33(96), pages 685-
736.
The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest payments.
 Are Zombies a problem?
less productive

• invest and innovate less than non-zombies

• seem to crowd out healthy onesless room for new entrance since dont exit
– Fewer firms exit markets → fewer firms enter
reduces business dynamism

– productive firms in industries with zombies find it

harder to attract capital firms in same in which there are many zombie firms
may have difficulties in finding capital

• market competition problem for other firms: they tend to crowd out other firms
causr they are large

• Access to credit presence of big incumbent (zombie) may reduce new entry and
competiition
diff for other firms to get resources

other firm has good idea but cannot enter cause not able to finance his idea

Results: lower productivity growth!

 Counterfactual gains from reducing zombies
% firms, investment, employment
what would be the impact if we reduce the nb of zombie firms to observed minimum which is slovenia in 2013
impact on inv and emplyment

we assume that its natural to have some zombies

in transition to death

gains will be higher for countries with more zombies

like italy and belgium
impact positive if wer kill zombies we can put resources in better use

Müge Adalet McGowan & Dan Andrews & Valentine Millot & Thorsten Beck Managing Editor, 2018. "The walking dead? Zombie
firms and productivity performance in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 33(96), pages 685-736.
 Counterfactual gains from reducing zombies
TFP

impact reduction share of zombie firms/tot nb firms is positive

larger for countres with larger share zombie firms spain and italy

if kill zombies we can improve efficiency of resource

to kill zombies we have to understand why we observe zombies

Müge Adalet McGowan & Dan Andrews & Valentine Millot & Thorsten Beck Managing Editor, 2018. "The walking dead? Zombie
firms and productivity performance in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 33(96), pages 685-736.
 Why More Zombies?
are there ,why do we observe zombie

• loose monetary policy: very expansionary very low interest rate reducing cost
funding
if im zombie andint increaeses the cost of funding
and refinancing debt incrrease
– Low costs of funding but if it remains easy to find funds refinance debt

– No incentive to increase NPL

why zomies crowd out other firms, how can they be alive
they are abble to borrow funds, if not able repay debt borrow funds
its like rolling over their debt, why are banks doing that , why investor put more money in
those firms, it is easier to lend some more money to firm that is already customer of bank , to which bank is
already exposedbecause the alternative is to writeoff loan extended in past becomes NPL but this is prob for bank
• Bankruptcy procedures recognizing that loan extended
to firm wont be repaid
– Costs; Time; Expected return
zombies are large than other firms and have
cost of leaving /exiting a market-closing a firm has a cost, legal cost, well established relationshiops with banks
takes cost, so all the legal aspects related to bankruptcy can icnrase so difficult to kill
misallocation and exit of firms and dynamism in business industry
 Why More Zombies?

• Sars-Cov2 crisis: thos already weak before pandemic are more likely tp become zombies
now
– Lower profits
– Governments’ policies to freeze the economy
– Easier access to credit
 Conclusion
prod growth imp for improving standard living-firms ger moree profit

• Productivity slowdown:
great recession played a role, but slowdown started well before criss so not full story
– Legacy of the crisis
– Structural shift change in industry mix : manuf-service in which prod growth is smaller -not ful
story
– techno-optimists vs. techno-pessimists
ability to innovate
• Ideas harder to find? less able to innovate than in past ideas less disruptive than past
• Measurement issue? especially with ICT, lot intangivle asset to be developed and
difficult to measure
– Reduced diffusion evident in lower business dynamism
decreasing level competition incumbent tso big
• Winner-takes-all dynamics adv of eco m keep compet out of market reinforced
nature techno we are using
• Lower business dynamism: misallocation and
big diff in terms producitvity among firms, and those less productive csn
zombification remain alive like zombies
we have misalloc
bc market not properly
→ Actions to reverse the trend in TFP?
working so ideas to revive productivity growth