Science Breakfast: Restarting Productivity Growth in Advanced Economies

Mc Kinsey & Company, Inc.

Friday, 25 August 2017
07:00 - 08:45 hrs CEST


Advanced economies are caught in a period of economic underperformance. Growth in GDP and labor productivity has been slowing since the 1960s in many economies and dropped to historic lows after the financial crisis. The slowdown in labor productivity growth, crucial for long-term per capita income growth particularly in aging economies, shows no sign of abating. Yet the only consensus for the reasons behind the slowdown is that there is no consensus.

Leading explanations for the productivity growth slowdown include: measurement challenges, particularly as service quality improvements are difficult-to-measure and services account for a growing proportion of advanced economies; a slowdown in technological innovation; the return of the Solow paradox which occurs when productivity improvements lag technological innovation; changes in firm level dynamics that reduce competitive intensity and the diffusion of innovation; secular stagnation with long-lasting output gaps as interest rates are near the zero lower bound; and hysteresis effects resulting from the financial crisis.

In this session, we identify the major reasons for the broad-based productivity growth slowdown evident today across advanced economies. We start from the perspective of the virtuous cycle of growth where increases in productivity and employment typically raise income for households and businesses, and in turn lead to increases in aggregate demand. This increase in demand in turn spurs a corresponding increase in the supply of goods and services through investment, growing employment, and rising productivity growth, which further increases aggregate demand.

We find that a number of steps in this virtuous cycle have weakened, trapping advanced economies in a vicious cycle of underperformance. A decline in capital intensity growth across advanced economies is the single biggest factor contributing to the productivity growth decline across advanced economies; declining total factor productivity growth has had an impact concentrated in some countries and sectors. Investment has not kept pace with an increasingly job-rich recovery. Our surveys suggest that weak consumer demand and uncertainty are primary reasons for sub-par investment.

Consumption, in turn, has been weak in line with slow wage growth stemming from an increasing decoupling of wages from productivity growth as consumer price indices diverged from GDP deflators and the labor share of income declined, exacerbated by post-crisis deleveraging and rising inequality; but most importantly, from slow productivity growth, closing the loop of underperformance.

However, we are cautiously optimistic for the future, as business confidence is returning, investment has been picking up, and vast gains enabled by digitization will spread further through the economy.


Restarting Productivity Growth in Advanced Economies, McKinsey Global Institute, forthcoming.

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Robert J. Gordon, The rise and fall of American growth: The US standard of living since the Civil War, Princeton University Press, 2016

David M. Byrne, John G. Fernald, and Marshall B. Reinsdorf, Does the United States have a productivity slowdown or a measurement problem?, Federal Reserve Bank of San Francisco, working paper 2016-03, April 2016

Davide Furceri, Gustavo Adler, Ksenia Koloskova, Marcos Poplawski-Ribeiro, Romain A Duval, and Sinem Kiliç Çelik, Gone with the headwinds: Global productivity, IMF staff discussion notes, April 2017.

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