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: 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.

View comments
Read article More on this topic More by this author

Blog Post

Powell's Federal Reserve

With the appointment of Jerome Powell as the next Fed’s chairman, President Trump break a tradition of bipartisan re-nomination and chooses someone who is not an economy by formation. We review economist’s opinions on this choice and the challenges ahead.

By: Silvia Merler Topic: Global Economics & Governance Date: November 13, 2017
Read about event More on this topic

Upcoming Event

Nov
29
11:00

Mergers and innovation

At this closed-door, off-the-record event we will discuss the impact that mergers have on innovation.

Speakers: Justus Haucap, Carles Esteva Mosso, Jorge Padilla and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Dec
12
12:30

The impact of Brexit for Research & Innovation in Europe

This event will feature a new and interactive format, with a restricted and high-level on-site audience and in parallel, it will be livestreamed on our website to remain public and attract the widest participation

Speakers: Alastair Buchan, Matt Dann, David Earnshaw, Kurt Deketelaere, Maryline Fiaschi, Martin Muller, Christian Naczinsky and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

The Bank of England’s dovish hike

For the first time since 2007, the Bank of England raised interest rates, with a hike of 25 basis points. At the same time, it provided forward guidance that outlines a very gradual path for future increases. We review the economic blogosphere’s reaction to this decision.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 6, 2017
Read article More on this topic More by this author

Blog Post

The capital tax cut debate

How much do workers gain from a capital gains tax cut? CEA chairman Hasset claims the tax cut will cause average household labour income to increase by between $4000 and $9000. Several commentators note this implies that more than 100% of the incidence of the tax is on labour. This question has triggered a heated discussion in the economic blogosphere, which we review here.

By: Silvia Merler Topic: Global Economics & Governance Date: October 30, 2017
Read about event More on this topic

Past Event

Past Event

Growth, productivity and social progress in Europe

On 26 October, Bruegel is organizing an interactive brainstorming seminar on Growth, Productivity and Social Progress in Europe. This is a closed-door, high-level workshop for a selected number of experts in the field.

Speakers: André Sapir Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 26, 2017
Read article More by this author

Blog Post

Bailout, bail-in and incentives

Ever since the outbreak of the global financial crisis, more and more rules have been developed to reduce the public cost of banking crises and increase the private sector’s share of the cost. We review some of the recent academic literature on bailout, bail-in and incentives.

By: Silvia Merler Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 23, 2017
Read article More on this topic More by this author

Blog Post

An irrational choice: behavioural economist wins Nobel Prize

Richard Thaler was awarded this year's Nobel Prize in Economics for his contributions to the field of behavioural economics. His work documents a set of cognitive biases affecting economic decision-making and casts doubt on commonly-held assumptions about the rational ‘homo economicus’ that inhabits economic models and theories. What are the implications for the economics discipline and public policy?

By: Konstantinos Efstathiou Topic: Global Economics & Governance Date: October 16, 2017
Read article More on this topic More by this author

Blog Post

On the cost of gun ownership

On 1 October 2017, 59 people were killed and another 489 injured in what is currently the deadliest mass shooting in US modern history. The author reviews recent contributions on the economic cost of gun violence, as well as the impact of regulation.

By: Silvia Merler Topic: Global Economics & Governance Date: October 11, 2017
Read about event More on this topic

Past Event

Past Event

Crowd Employment

This event aims to discuss the various nuances and diversity that characterize crowd employment.

Speakers: Cristiano Codagnone, Valerio Michele De Stefano, Irene Mandl, Georgios Petropoulos and Amit Singh Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 5, 2017
Read article Download PDF More by this author

External Publication

An innovation deficit behind Europe’s overall productivity slowdown?

Reinhilde Veugelers' chapter in "Investment and Growth in Advanced Economies", conference volume of the European Central Bank’s Forum on central banking in Sintra.

By: Reinhilde Veugelers Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: October 2, 2017
Read article More on this topic More by this author

Blog Post

The Economics of Healthcare

Healthcare reform has been a thorn in the side of the US administration for several months, prompting President Trump to declare that “Nobody knew that healthcare could be so complicated.” We review recent economists’ views on the issue.

By: Silvia Merler Topic: Global Economics & Governance Date: October 2, 2017
Load more posts