Productivity growth has been a concern of many economies across the world since the financial crisis of 2007.  A recent McKinsey paper shone a particular light on the situation in the UK.  The paper identifies four main culprits that explain much of the decline in productivity growth:

• Strong employment growth, with hiring in the UK significantly ahead of European peers after the recession.  Firms generally hired people rather than investing in capital of efficiency improvements, with this growth especially strong among the young and old.
• A decline in investment, which went hand in hand with the investment in personnel mentioned above.  It resulted in a job-rich but investment-weak recovery.
• Uneven digitization, with the digitization efforts that have taken place at too small a scale to really be showing in productivity statistics.
• Boom and bust in the financial sector, with the UK financial sector experiencing twice as large a slowdown in productivity as the US experienced.

A recent study from Bocconi University provides its own perspective on the situation, and the authors suggest that the main culprit is the general difficulty economies have had in reallocating resources between firms either in the same industry or geographical area.  What’s more, these difficulties have been most evident in industries experiencing rapid rates of technological change.

Italian malaise

Whereas the McKinsey team focused their attention on the UK, the latest study instead focused on Italy.  The research team believe that the 25 years of stagnating productivity growth seen in the country provides a much better insight into the true causes of poor productivity growth.  The data suggests the heart of the problem is resource misallocation between less productive and more productive elements of the economy.

Interestingly, the study suggests that this misallocation of resources is often stronger within industries and geographical areas than it is between them.  As a result, the authors believe that the best policy responses should focus their energies inside specific industries, helping to reallocate resources between the worst performing companies to the better performing ones.

The authors suggest that this misallocation of resources has increased substantially since 1995, with this in turn contributing significantly to the poor productivity in Italy in this period.  Indeed, they believe that had the allocation of resources stayed at 1995 levels, productivity would be 18% higher today than it currently is.

Interestingly, whilst most fingers point to southern Italy in terms of lagging productivity, the report suggests the worst culprits are firms in Northwestern Italy, where technological progression has moved fastest.  Much of this problem revolves around companies who have a lot more resources than they need or deserve, and so the authors urge policy makers to make it easy for firms to file for bankruptcy, to promote a more efficient credit market, reform unemployment benefits and to focus more on the worker than the job when drafting employment regulations.

Among under-resources firms, there are some with a higher investment share in relatively intangible assets, including R&D and branding.  This area would be helped by better developed non-banking components of financial markets, such as venture capital and private equity, which are more likely to support highly innovative ventures.  What’s more, firms with a high proportion of graduates were also found to be under-resourced, which the authors believe suggests that firms who are finding it hard to fill positions with the right caliber candidates.

It’s likely that there is no easy answer to the productivity challenges of the west, but the more studies such as these that aim to shed light on the matter, the more informed policy responses can be.