Bart van Ark, Conference Board: Advanced Economies Are Rapidly Losing Edge in Productivity

January 23, 2012

According to a report released by The Conference Board, the global business membership and research organization, productivity growth weakened substantially across the globe in 2011, with the drop-off most dramatic in advanced economies. The 2012 Productivity Brief, based on data from The Conference Board Total Economy Database, shows productivity — typically measured as output per person employed or hour worked — increased at a much slower rate in 2011 than most economists had predicted, with the trend likely to continue into 2012.

2012 Productivity Brief: Key Findings PDF

Overall, labor productivity worldwide grew 2.5 percent in 2011, down from 3.6 percent in 2010. This decline was based entirely on a slowdown in output growth, which fell from 5 percent in 2010 to 3.9 percent in 2011; average employment growth remained practically unchanged compared to the previous year at 1.4 percent. Almost all advanced economies saw sharp declines from the previous year. With output contracting 0.5 percent in 2011, productivity growth in Japan stood at 0.2 percent, a huge drop from 5.0 percent in 2010. Likewise, productivity growth fell from 2.7 percent to 0.6 percent in the U.S., and from 0.9 percent to 0.2 percent in the U.K. In the Euro Area, productivity growth weakened from 1.8 percent in 2010 to 1.2 percent in 2011, which was still highest among major advanced regions.

“Productivity remains the key driver of growth worldwide,” said The Conference Board Chief Economist Bart van Ark. “This is especially true during times of austerity. In 2012, all output growth in advanced economies will have to come from increase in labor productivity as there’ll be, on balance, virtually no job creation across the U.S., Japan, and Europe.

Productivity growth also slowed in many emerging and developing economies, but generally by a much smaller margin — on average down from 5.5 percent in 2011 to 4.7 percent in 2010. China’s productivity growth rates, one of the world’s highest, stood at 8.8 percent in 2011, down from 10 percent in 2010. In India, the growth rate fell to 5.2 percent from 6.3 percent. Productivity growth fell more significantly in Latin America, from 3.5 percent to 1.5 percent. The Middle East, along with Russia and the other member countries of the Commonwealth of Independent States, were the only regions that saw modest improvements in productivity growth in 2011.

For 2012, The Conference Board anticipates further weakening in labor productivity growth (measured as the change in output per person employed) worldwide, to 2.3 percent. Major advanced regions will be the worst performers — with productivity growth at 1.2 percent on avergae. The 2012 Productivity Brief also notes a long-term decline in the growth of Total Factor Productivity (TFP), a more sophisticated measure relating output to all factors of production, rather than just labor. At a current trend growth rate of about 0.5 percent worldwide, TFP growth has been trending lower since the early 2000s, turning negative in the U.S. for much of that time, close to zero in the Euro Area, and dropping precipitously in several emerging economies over the last several years. Likely to continue in 2012, this trend suggests a slowdown in the returns on technological progress and innovation, especially in advanced economies.

“Even today, the U.S. remains by far the most productive large economy in the world, with China’s output per worker almost 85 percent lower,” says van Ark. “However, given the current divergent trends in productivity growth, advanced economies are steadily losing their edge. The challenge for both advanced and developing economies as we slowly emerge from the global downturn is the same: to break through the usual short-term trade-off between productivity and job growth by focusing on the creation of more productive jobs — not an easy task in an environment of government austerity and budget cuts.”