Higher productivity growth for better and more sustainable economic development after the Covid-19 crisis

The outbreak of the coronavirus epidemic has led to a slump in economic output in many countries around the world. We do not yet know how long this pandemic and its health, social and economic consequences will last. In order to at least overcome the economic crisis, productivity gains – especially in service sectors – are important. This means that productivity should not be increased through more intensive work and more stress, but through technological, organizational or other means.

Over the past thirty years, labor productivity growth has slowed in many developed and other economies. Up until the 1980s, annual growth in many places was 3 or more percent. After that, productivity gains have steadily decreased. A similar development is observed in other countries in Europe and in North America. Labor productivity has been particularly weak since the onset of the financial crisis.

These small increases in labor productivity are paradoxical. Because at the same time there is an accelerated technological change that influences our everyday life and that should make our work more productive. Innovations are extremely important. One problem, however, is that innovations are currently only slowly penetrating the economy. Knowledge-intensive service and industrial sectors (such as the pharmaceutical industry or industries in the field of information and communication technology) have recorded high productivity growth. Other sectors have significantly lower productivity gains. In recent years there has been little diffusion of technological progress from highly innovative companies to the rest of the economy. Various research papers show that the productivity gap has opened between top companies in knowledge-intensive industries and the rest of the companies. Innovations are always more expensive and penetrate the economy more slowly.

Why does the rapid technological change currently not lead to higher productivity growth? One possible explanation is that new technologies are associated with significant changes for society and the economy. For example, the increasing use of artificial intelligence in the labor market is causing both winners and losers and has probably increased inequality in recent years. A society needs time to find out how new technologies can be used in such a way that they improve well-being and economic development and minimize any negative effects and risks. However, this also means that the possibilities of new technologies are initially being implemented only slowly or are being used for activities that prove to be of little use for society or the economy as a whole. This applies in particular to socially and economically crucial service sectors such as the finance, education and health sectors. In these important sectors, productivity development has mostly been slow in recent years. These sectors fulfill important social functions and are central to the sustainable development of society. Widespread access to health services, the education system and financial services promote equal opportunities and reduce inequality. These sectors are also responsible for a large proportion of the overall economic value added. They also perform catalytic functions: good educational, financial and health systems can improve development in all economic sectors, since almost all people and companies use the services of these sectors. Higher productivity growth would mean less work and improve the quality of these services.

It is often emphasized that people have to adapt increasingly to technological progress. Keywords include lifelong learning, creativity or digital skills. Investments in education and training are extremely important, but not a panacea. A lot has been invested in education and training in recent years. Nevertheless, productivity advances on a broad level have failed to materialize. In addition, the time we use for training and further education cannot be extended indefinitely. Productivity advances on a broad level should therefore only occur if new technologies – be it software, 3D printers or other innovations – complement existing professional skills better and simplify work even more. This applies in particular to services.

Innovations undoubtedly have the potential not only to make our lives more pleasant and sustainable, but also to increase the productivity of our work. If you believe the futurologists, new technologies such as robotics, nanotechnology, 3D printers or the Internet of Things will merge more and more. It is important that new technologies complement people’s existing skills better and that productivity not only increases in innovative sectors and regions. These aspects must play a greater role in the public debate. Sustained productivity increases across the board can ensure social cohesion and secure our prosperity.

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