Raising workers' quality is key to global productivity

Subject

Total factor productivity.

Significance

The first estimates in the 1960s suggested that the growth of labour and capital inputs accounted for 20-30% of economic growth, implying that total factor productivity (TFP) improvements accounted for the remaining 70-80%. However, the skills embodied in labour and the technology embodied in capital can now be measured much more accurately. After these contributions are subtracted, the role of TFP in growth is reduced.

Impacts

• Improvement in the quality of capital is closely tied to rising investment in capital, especially information and computer technology.
• If investment growth continues to slow, this will affect future output both through the volume of capital as well as its productive quality.
• Ageing populations and persistent ultra-low rates raise ‘secular stagnation’ fears; the future will depend on a better-educated workforce.