Blog Post

The breakdown of productivity diffusion

The OECD has been pushing the idea that the productivity slowdown is not so much due to a lack of innovation but rather due to a lack of innovation diffusion between firms.

By: and Date: June 27, 2016 Topic: Innovation & Competition Policy

The OECD view

Jane Bourke writes that a recent OECD report – “The Future of Productivity” – presents a new perspective on what drives national productivity growth. The OECD explains that in every world economy there are some ‘frontier firms’, which are internationally competitive and match global high standards in productivity. However, the majority of firms – up to 80 per cent – are not in this category. These firms may have a more domestic market orientation, and much lower average productivity and the OECD calls them ‘non-frontier firms’.

Timothy Taylor writes the report argues that slower productivity in high-income countries is not because cutting-edge firms are slowing down in their productivity growth, but rather because other firms aren’t keeping up. To put it another way, productivity growth isn’t diffusing across economies.

Chiara Criscuolo writes that the slow productivity growth of the “average” firm masks the fact that a small cadre of firms are experiencing robust gains. Timothy Taylor writes that the evidence of Figure 11 below suggests that the possibilities for productivity growth haven’t slowed down, but that large parts of the economy are having a harder time putting the practices that lead to faster productivity growth into effect.

bebr 25 6 16 1

Alex Tabarrok writes that it’s unclear why this is happening. Patents and other intellectual property being locked up in the frontier firms is one possible answer. Another possibility is that innovations are embedded in capital so you need new investment to diffuse innovation and business investment has been low for some time perhaps for “cyclical” reasons. The OECD argues that this is consistent with: i) longer run evidence on the penetration rates of new technologies (e.g. Comin and Mestieri, 2013); ii) winner takes all dynamics (Gabaix and Landier, 2008); and iii) the rising importance of tacit knowledge.

Winton Bates writes that the authors discount the winner-take-all explanation because the divergence is not confined to the ICT sector where winner-take-all dynamics might be expected to be most important.

Inequality among firms and income inequality

Alex Tabarrok writes that a failure of innovation diffusion is also consistent with the argument that much of the rise in income inequality can be attributed to greater inequality among firms. Jane Bourke notes that a recent study by Card et al. (2013) suggests that the observed rise in wage inequality appears to at least reflect the increasing dispersion in average wages paid across firms. Thus, raising the productivity of laggard (late adopter) firms could also contain increases in wage inequality, while reducing costs and improving the quality and variety of goods and services.

Jae Song and coauthors write that in the absence of comprehensive evidence on wages paid by firms, it is frequently asserted that inequality within the firm is a driving force leading to an increase in overall inequality. Using data on wage earnings for a one-sixteenth percent representative sample of U.S. workers, and the (100 percent) population of U.S. firms, between 1978 and 2012. Contrary to the assertions made by Mishel and Sabadish (2014), Piketty (2013), and others, we find strong evidence that within-firm pay inequality has remained mostly flat over the past three decades.

Matt O’Brien writes that new research shows that it’s not super-managers, but rather super-managers and everybody else at super-companies that are behind the growing income gap. The research team of Jae Song of the Social Security Administration, Fatih Guvenen of the University of Minnesota, and David Price and Nicholas Bloom of Stanford were able to look at what had previously between private earnings data for every company between 1978 and 2012—the best data we have so far—and found that the pay gap between executives and their own workers had barely changed during this time. What had changed, though, was the pay gap between every worker at the highest-paid firms and everyone else. In other words, inequality exploded because the top 1 percent of companies were making more and paying all their employees more. This was true across the country and across industries.

Jae Song and coauthors write that there are several potential explanations for these findings. One possibility is increased sorting: that is, perhaps, in the 1980s firms were employing workers from a broader set of skill levels but have become increasingly specialized over time, so that now firms employ workers from narrower skills groups. Therefore, some firms pay much higher average wages than before because their average worker quality has increased. A second potential explanation is growing productivity differentials across firms. If the production technology delivers positive assortative matching and workers are mobile and then higher skill workers will flock into higher productivity firms.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Opinion

Europe may be the world’s AI referee, but referees don’t win

The EU needs to invest in homegrown technology.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: February 19, 2020
Read article More on this topic More by this author
 

Blog Post

The dynamics of data accumulation

The bigger you are, the more data you can harvest. But does data accumulation necessarily breed monopolies in AI and related machine learning markets?

By: Julia Anderson Topic: Innovation & Competition Policy Date: February 11, 2020
Read about event More on this topic
 

Past Event

Past Event

The quality and quantity of work in the age of AI

At this event, the panelists will discuss the implications of Artificial Intelligence on the labour market and the future of work in general.

Speakers: Robert Atkinson, Anna Byhovskaya, Maria Demertzis, Carl Frey and Daniel Samaan Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 5, 2020
Read about event More on this topic
 

Past Event

Past Event

The future of think tanks and policy advice

This event takes a look at the future of think tanks and policy advice. Current opportunities and threats will be discussed.

Speakers: Olena Carbou, Goret Pereira Paulo, Giuseppe Porcaro and Anthony Teasdale Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 30, 2020
Read article More on this topic
 

Podcast

Podcast

The science of Brexit

On Saturday morning, the United Kingdom will wake up outside the European Union. After 37 years of collaboration, how will Brexit affect research and innovation in Europe and in the UK? What should be the next steps undertaken by both in order to maintain the same level of cooperation? This week, Nicholas Barrett is joined by Maria Demertzis, Guntram Wolff and Michael Leigh, Senior Adjunct Professor of European Studies at the Johns Hopkins University, to discuss a post-Brexit agreement for research and innovation.

By: The Sound of Economics and Bruegel Topic: European Macroeconomics & Governance Date: January 29, 2020
Read about event
 

Past Event

Past Event

A post-Brexit agreement for research and innovation

What is the future of EU's and UK's relationship on research and innovation?

Speakers: Gina Dowding, Philippe Lamberts, Michael Leigh, Adrian Hayday, Clare Moody, Martin Muller, Joe Owen, Jaroslaw Pietras, Uta Staiger, André Sapir, Beth Thompson and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 28, 2020
Read about event More on this topic
 

Past Event

Past Event

The European AI policy: writing the first lines of the code

At this closed-door event, an open discussion with Margrethe Vestager will contribute to her work on artificial intelligence. The aim of these discussions is to set out a policy and regulatory approach in the form of a white paper, including the human and ethical implications of AI.

Speakers: Margrethe Vestager and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 21, 2020
Read article More on this topic More by this author
 

Opinion

Could the U.S. economy be experiencing a hidden tech-driven productivity revolution?

In the last decade, most advanced economies have grown more slowly than before. Slower growth has frequently been seen as a legacy of financial crises, especially that of 2007–2009.

By: Marek Dabrowski Topic: Innovation & Competition Policy Date: January 6, 2020
Read article More on this topic
 

Blog Post

AI and the Productivity Paradox

In this blog post, I review the main explanations for this paradox and I briefly discuss relevant policy options in order to increase the contribution of AI on productivity

By: Georgios Petropoulos and Bruegel Topic: Innovation & Competition Policy Date: December 24, 2019
Read about event More on this topic
 

Past Event

Past Event

Issues in productivity measurement

This Bruegel public event is organised in the framework of MICROPROD, a research project that aims to improve our understanding of productivity, its drivers and the way we measure it. Panellists and participants will take stock of the current challenges in productivity measurement, discuss the preliminary findings of the project and reflect on future research and policy priorities.

Speakers: Maria Demertzis, Filippo di Mauro, Alexandr Hobza, Peter Bøegh Nielsen, Lynda Sanderson and Bruegel Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 4, 2019
Read about event More on this topic
 

Past Event

Past Event

Improving regulatory policy formulation and institutional resilience in Europe

Are large differences in the resilience of individual economies related to differences in the quality of country-level institutions that shape the absorption and response to these shocks? At this event we'll discuss the evolution of labour markets, and the role of institutional design and good process.

Speakers: Arup Banerji, Maria Demertzis, J. Scott Marcus, Céline Kauffmann, Rogier van den Brink and Bruegel Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 13, 2019
Read article More on this topic
 

Blog Post

Work Protection in the Digital Age: Towards a new social contract

Over the past few years, new business models have emerged, empowered by digital technologies. These have disrupted a range of activities, from food delivery and transportation to accommodation and venture capital. Digital companies and their new business models collectively make up the so-called platform or collaborative economy. New forms of work have been created posing the question: How can the social contract catch up?

By: Georgios Petropoulos and Bruegel Topic: Innovation & Competition Policy Date: November 4, 2019
Load more posts