by Catherine L. Mann*
To achieve
rising and shared prosperity requires not a silver bullet but an arsenal of
policies deployed in systematic fashion.
Most important, it requires a new
level of understanding of how those policies interact and how they play out in
the actual workings of an economy: among workers, in factories and offices, and
between nations.
This is a challenge, but policy makers can compare strategies
and learn best practices to increase the likelihood for success.
Moreover, in a
globalized world, policy makers will need to consider each other’s approaches
even as they focus on their own goals. And what is
the goal?
Productivity growth is necessary but not sufficient to support
broad-based well-being, which also depends on quality of life, health, and
environment.
Productivity growth both affects and is affected by the
distribution and volatility of employment and income—at the individual and
household level—and these feed into well-being, both within and across
generations.
Ongoing
research is uncovering the complexity of the productivity process. As evidenced
in the McKinsey case studies, and confirmed by analysis using firm-level data,
current assessments of the future path of productivity underestimate the
potential for improving the pace.
Analysis with large firm-level data sets
reveals the relative importance of different avenues of improving productivity.
The diffusion of best practices across firms within a sector, and the uptake of
productivity-enhancing lessons learned across sectors can increase productivity
within an economy and allow it to catch up to the frontier.
Even in countries
that are home to frontier firms, there is incomplete diffusion of known
technologies within and, even more so, between sectors.
Policies that support
business and worker dynamism and the reallocation of resources promote this
within- and between-sector diffusion and catch-up.
But diffusion and catch-up
are not enough to ensure rising prosperity: innovation that pushes out the
technological frontier is also needed, and this depends on the extent and
efficiency of resource reallocation, and the magic and confidence of ideas.
What holds
back firm and worker dynamism? In the current environment, sluggish demand
makes reallocation particularly costly.
And local factors are certainly
important in some (although not all) economies, such as access to credit and
quality of business regulation.
However, in general and across nearly all
economies, one crucial factor limiting a firm’s ability to restructure and
reallocate is the poor match between workers and jobs.
The matching process
includes characteristics of the labor market and labor policies, but
fundamentally this is about skills and location and the psychology of change.
The reallocation process itself affects matching. Productivity growth tends to
expose workers and households to increased job and income volatility, which
adds to the growing inequality and low social mobility across generations.
As
the pace of technological change increases, and as people age, the need to
change jobs and the nature of the work itself may increasingly bear on
well-being.
Thus a
pursuit of productivity alone will not maximize potential economic gains nor
ensure shared prosperity.
Even as we redouble our policy efforts to promote
economic activity, we must deepen our understanding of how policies can improve
the relationship among workers, working, and change and how regional and
international policy affects individual economies.
Research examining the
behavior of individuals is starting to shed light on which policies can best
help individuals navigate change.
This is important also because faster and
more efficient resource reallocation helps economies to recover more quickly
from adverse shocks, thereby contributing to economic resilience, reduced
inequality, enhanced productivity growth, and higher living standards.
*Catherine L. Mann is the chief economist at
the Organisation for Economic Co-operation and Development and a former senior
international economist of the US president’s Council of Economic Advisers.
By: N. Peter Kramer
