Productivity growth is a nice thing to have. You – as an individual or a whole economy – can produce more goods and services without working any harder, or work shorter hours while maintaining material living standards.
So Christian Odendahl is right to be concerned about the just-released 2015 GDP figures for Germany, which show that productivity has still failed to pick up noticeably since recovering from the crisis. Output per working hour in Germany continues to rise at the sluggish pace of around ½ of a percentage point per annum. In the period between unification and the last year of the pre-crisis boom productivity growth had been around 1.8%.
Here is a graph showing the German productivity trend. (This is essentially the same graph as Odendahl’s, although for reasons that will soon become apparent, I use annual European data.)
Figure 1: Productivity growth in Germany, GDP per working hour, annual % change
The steady decline is clear, interrupted by the collapse and then initial recovery during the crisis. Odendahl briefly discusses some reasons and remedies for the German trend. In fact, hand-wringing about sluggish German productivity is not new. Back in the early and mid-2000s Adam Posen (subsequently Bank of England governor, now at the Peterson Institute) did the rounds with dire tales of German stagnation and the deep structural reasons for it located in German political economy: its banking sector, the cloying influence of its consensual industrial relations system and so on (e.g. here and here). Meanwhile German economists such as Hans-Werner Sinn were asking rhetorically whether Germany could still be saved (Ist Deutschland noch zu retten?). As we now know, it could.
Before jumping to the conclusion that German institutions are broken and need fixing, a simple exercise is to compare German performance to that of its European peers. The next figure shows productivity growth rates per working hour in the “old” members of the EU. As you can see, you cannot see very much. I have given Germany a thicker, dotted, black line, smoothed the data to reduce volatility (this is why the series starts in 1994) and removed Celtic-tiger Ireland to get the biggest possible scale. Yet it is clear that the path of German labour productivity growth is absolutely in line with broader experience in Europe. All countries are on a longer-term declining trend, and Germany is firmly in the middle.
Figure 2: Productivity growth in EU15 countries, GDP per working hour, annual % change, 3-year moving average
Source: AMECO; Ireland excluded.
You can see this more clearly in the next figure which plots the (smoothed) German series against a simple average of the EU15 counties (with Ireland back in). The green bars show that the labour productivity difference between Germany and the simple average of the other western European countries is typically small and follows a broadly cyclical pattern. (It is no coincidence that German productivity increases were below average in the early-mid 2000s when the lamenting about weaknesses of the German model was at its height.) Ultimately, though, these differences average out to … almost exactly zero.
Moreover, in evaluating German performance it is worth noting that it has been achieved despite the fact that at the start of the period absolute productivity per working hour was substantially above the EU15 average. In other words, despite a substantially smaller potential for “catch-up” productivity gains, the German economy has delivered almost exactly the same rate of labour productivity growth (per working hour) as its peers since 1992. And more recently its performance has been rather better, albeit against weak competition.
Figure 3: Productivity growth Germany and EU15, GDP per working hour, annual % change, 3-year moving average
Source: AMECO; EU15 is simple average.
Productivity: Take a broader view
There is, of course, nothing wrong in principle with examining national political-economy institutions to look for ways to raise productivity. However, the evidence presented here strongly suggests that broader factors affecting the advanced economies – recent labour-productivity figures for the US are somewhat higher, but the decline from the earlier trend is just as pronounced – must be driving productivity developments.
What are those factors? The short answer is: we don’t know. Explanations and conjectures abound. Maybe it is simply harder to carve out productivity gains “at the frontier” as living standards rise. Maybe a failure to sustain aggregate demand at adequate levels has depressed capital investment. Maybe weak wage growth and a falling wage share have reduced the incentive to introduce labour-saving technology. Maybe, even, the declining productivity trend is a statistical illusion resulting from the fact that many things that used to be costly are now essentially free (and this is not fully reflected in standard price deflation procedures). Clearly these are not mutually exclusive explanations and probably all of them are at play to some extent.
The productivity debate is an important debate, but the data suggest it should not primarily be conducted in national terms. More bluntly: it should not be used to attack specific national institutions that the author in questions dislikes (very likely for other reasons). The evidence suggests that deeper forces are at work, affecting all advanced economies. Getting to the bottom of them is an important research challenge.