Prosperity - economic growth, social development and improvements in living standards - depends on two key factors: labour productivity, measured as output per hour worked, and labour input growth, measured as total working hours. The report notes that one of the biggest challenges for society in this current economic downturn is to find a balance between saving jobs and the need for businesses to cut costs in order to survive the crisis.
"The key to any successful and sustainable growth strategy is to find the optimal balance between labour productivity growth and labour input growth," says Bart van Ark, Vice President and Chief Economist of The Conference Board. "In other words, there is a need for the creation of more productive jobs that lead to generating higher average living standards. Unfortunately, there is no silver bullet to create productive jobs that can be universally applied irrespective of time and place."
Productive jobs are also the primary mechanism by which the gains from productivity growth can be widely distributed across the economy - to consumers through lower prices, and to workers as higher rewards. The latter provides the resources for new investments and a sustainable growth path.
Since 1995, both Europe and the U.S. have seen about two-thirds of their Gross Domestic Product growth generated by labour productivity, and about one-third by an increase in working hours. Germany, on the other hand, has experienced moderate productivity growth (1.4%) and only modest growth in working hours in the last few years.
The U.S. entered the current economic downturn at much higher productivity levels and faster growth rates than Europe. Within Europe, many neighboring countries compare favourably to Germany in combining productivity and employment growth.
The labour income share in most countries, especially in Germany, has declined significantly since 2000, due more to falling real wages than weakening productivity growth. This can be mainly traced to the services sector. Strikingly, the inequality in income earned in the market in Germany is not any lower than in the U.S. - and the ultimate inequality level is only less than in the U.S. because of a more intense secondary redistribution through the tax and benefit system.
The overall productivity performance of Germany has not been outstanding in recent years. In manufacturing, Germany lags U.K., Sweden and the U.S., has done no better than France and the Netherlands, and is only slightly better than the EU as a whole. In market services, Germany shows by far the worst performance among the comparator countries.
The longer-term outlook raises further concerns. Intangible investments, which are a key to innovation and productivity growth, are weak in Germany, when compared with France, the U.K. and the U.S. Examples of intangibles are computerized information, innovative property, and economic competencies. Relative to GDP, intangible investment in the market sector are lowest in Germany at 7% of GDP, compared with just over 12% of GDP in the U.S. (based on 2004 data).
Key factors to raising productivity are incentives for individuals, investment in human capital, information and communications technology (ICT), and other kinds of intangible investment.
Intangible investment reflects some of the key human capital inputs required to sustain innovation and productivity growth, primarily through education, training and increased skills of workers. But intangibles also reflect the overall process of business and societal innovations, including the improvement of organizational and management processes as well as the social, cultural and natural environment.
There are strikingly large differences between countries in their ability to simultaneously raise productivity and employment, especially since 1995.
Sweden has grown productivity about twice as fast as Germany and combined that with a small albeit significant increase in labour inputs (0.6%) over the same period. Since 1995, the Netherlands increased working hours at double the Swedish rate, but productivity growth fell between that of Germany and Sweden.
Accounting for national differences, the balance between productivity and labour growth is largely made up by differences in the way economies are organized and managed. At the same time, however, shocks to the local, national or global economic system can either speed up or slow adjustments in the contribution of productivity and hours intensity to growth and their distribution.
"The optimal balance between productivity and hours intensity depends on many factors, such as the relative performance of manufacturing and service industries in the economy," concludes van Ark. "Some policy measures, such as heavy cost-cutting, may strengthen rather than weaken the trade-off. Some factors may not appear to be under the direct control of policy makers. But incentives for individuals, business strategies and government policies toward investments in ICT, human capital and other kinds of intangible capital can make a large difference in raising the productivity of jobs."
