By David Born and Christian Krys

In the wake of the COVID-19 pandemic, the world has witnessed a rebound in global GDP growth. However, the post-pandemic economic recovery was primarily driven by an increase in the volume of work as people were returning to their jobs after the pandemic. The output per hour worked, a common measure of productivity, has contributed only little to post-pandemic growth. In fact, productivity growth has been on a decline for decades, becoming a major concern for economists, policymakers, and business leaders. Decelerating productivity growth undermines long-term economic expansion and reduces competitiveness, particularly in light of changing demographics.

Productivity, whether at the macroeconomic or firm level, can be enhanced through three principal channels: firstly, by augmenting the capital stock via investment in machinery and equipment, thereby enabling workers to generate higher output with the same or fewer inputs. Secondly, by elevating the quality of human capital through targeted improvements in employee skills and competencies. Finally, the efficiency of the interaction between capital and labor can be increased. This measure is referred to as total factor productivity (TFP).

Productivity growth is decelerating

It is important to note that the slowdown in productivity growth is not a recent development. The deceleration has persisted for decades and became particularly pronounced following the financial crisis. In contrast, emerging markets experienced a substantial acceleration in productivity growth up until the financial crisis. Here, the acceleration was primarily driven by their integration into Western value chains, accompanied by significant investments in capital stock and enhancements in total factor productivity (TFP). However, since the financial crisis, productivity growth in emerging markets has also decelerated markedly.

Structural reasons behind the decline

The deceleration in productivity growth, particularly within advanced economies, can be attributed to several structural factors. These include a reduced propensity for investment following the financial crisis, particularly in the private sector, which has weakened the contribution of capital; inefficient allocation of resources, leading to tepid growth in Total Factor Productivity (TFP); and a slowdown in innovation at the technological frontier.

Particularly in view of the worsening demographics in many major economies, revitalizing productivity growth should be a top priority. Many countries are already experiencing tight labor markets. In the coming years, many people will retire, exacerbating the issue — particularly affecting the economies in Europe, Advanced Asia and China. Given the foreseeable decline in labor volumes and the absence of expected productivity leaps, forecasts already suggest that global economic growth will decelerate relative to historical rates - with potentially negative effects on public budgets and living conditions. Additionally, increasing productivity growth can play a crucial role in advancing towards a more sustainable economy by optimizing resource use and reducing environmental impact, thus contributing to combating climate change.

Achieving productivity growth requires joint efforts from the public and private sector

To set the course for enhancing productivity growth, policymakers and companies alike need to work hand in hand. Policymakers need to create an enabling environment by implementing supportive frameworks and incentivizing investment, improving human capital, and addressing resource misallocations. Concurrently, companies must capitalize on these conditions to enhance their productivity. In our view, there are four pressing areas where action from companies is urgently required.

First, companies need to address the challenge of labor supply shortages. Strategic workforce management enables companies to identify the talent and skills they will need in the future to master technological, cultural and regulatory challenges. Ensuring that employees with the appropriate qualifications are optimally allocated within the organization can mitigate inefficiencies and enhance productivity.

Second, employing AI technology can drive productivity growth across the entire organization. However, AI adoption is a challenging task for most companies and involves changes in the organizational set-up of a firm. And it requires new strategies for building up and leveraging the necessary skills among the workforce.

Third, companies need to monitor and manage their capital efficiency more thoroughly. Only when a company allocates its investments to the most effective and efficient use – i.e., with the highest returns on investment (ROI) – it can reach maximum capital productivity.

Fourth, companies need to evaluate their sources of capital and possibly reconfigure them to be better equipped with capital. Starting from a sound business planning, companies need to analyze their capital demand considering their current financing profile. Based on this, a financing concept and strategy can be developed and implemented.

By aligning business strategies with productivity-enhancing measures and leveraging technological advancements, companies can drive sustainable economic growth while maintaining competitiveness in global markets.