Global Growth Headache: Japan is an example of what happens when you ignore the little guy.

AuthorNakamae, Tadashi

In 2018, a time of rapid technological innovation, decelerating productivity growth seems an unlikely source of economic worry. Technology has helped industries, especially manufacturing, become increasingly efficient. Unfortunately it has not boosted productivity across the board.

Amid a global trend in which households and industries are becoming increasingly polarized, big dominant companies with high productivity are boosting their share of the market, while their smaller brethren are squeezed and less able afford to raise productivity. In highly productive industries, the top companies cut jobs and become even more productive. Meanwhile, their less successful competitors have to lay off workers because business is down. The redundant workforce then moves (if lucky) to other industries (often in the services industries) that are not yet efficient enough to be caught up in this cycle. From a macroeconomic point of view, the ensuing rise in the number of workers in such industries pushes down productivity as a whole.

Thus the world economy is losing its ability to grow. Productivity growth has almost come to a standstill. Although the easy monetary policies of the past decade or so have helped to obscure this, the underlying structural problem has become too big to ignore. The economy will not grow as long as productivity growth remains close to zero and the number of employed workers barely increases.

This is not to say that technology and innovation are bad. Unfortunately, recent improvements in technology--and the ability to make them--have been concentrated in only a fraction of the economy.

OECD data shows improving rates of productivity among manufacturers from 2001 to 2013 (Figure 1). The world's top 5 percent companies saw their productivity improve 33 percent (2.4 percent at annualized rate) during a period in which the remaining 95 percent experienced an improvement of only 7 percent (0.6 percent annualized). The service sector, which combines a variety of industries, saw the top 5 percent companies record a 44 percent (3.1 percent annualized) rise in productivity while the remaining the 95 percent saw only a 5 percent (0.4 percent annualized) gain.

The distribution of wealth is just as skewed. In the United States, the ratio of employee income to GDP has been falling sharply since the beginning of the 2000s. Even as technological innovations in information technology and artificial intelligence have accelerated, the share of...

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