Productivity growth and its driving forces
It is important to understand productivity growth and its causes, as productivity is the driving force for economic growth and welfare. Increased productivity enables, among other things, higher wages, more leisure time, and improved healthcare. To increase the understanding of productivity development and the driving forces in Sweden, this study focuses on:
- productivity development in Sweden compared to other countries,
- the driving forces behind productivity development and how these have changed over time
In the analysis, Sweden is compared with Denmark, Finland, the United Kingdom, Germany, and the United States. In addition, a brief literature review of methods for measuring productivity is presented. The report complements previous studies by comparing various productivity measures among different countries in relation to the countries' development in terms of GDP per capita. Moreover, an analysis of the explanatory factors for productivity development is largely lacking in previous Swedish studies.
All in all, the study contributes to an introduction to our project "How can the state promote productivity in Swedish companies?". In coming reports, we will delve into differences in productivity among companies and how these have changed over time.
The reference year affects how we view Swedish productivity development
The reference year is important when studying productivity. The selected starting year affects whether Sweden performs well in relation to other countries. To provide the most accurate picture possible, we have chosen 1970, 1995, and 2009 as reference years for studying productivity.
In 1970, Sweden had a high level of productivity relative to the other countries studied. This can be followed by a period of weaker productivity growth during subsequent years. This was the case for Sweden, which experienced a weak productivity growth during the 1970s and 1980s. However, these results do not necessarily follow because weak development can also be attributed to government policy at the time. During the 1990s, Sweden implemented several reforms, such as improved incentives in the labor market, introduction of a floating exchange rate, and EU membership.
From 1995, Sweden was among the strongest countries in this comparison. We have not studied whether this is an effect of a recovery following the previous period, or of reforms implemented, the floating exchange rate, EU membership, or other factors. We point out that the productivity development has been strong in comparison to other countries, something that should not be confused with the change in GDP per capita.
From 1995 on, we also look at the development in total factor productivity (TFP) using growth accounting. This measures how much more we can produce after considering changes in both the labor force and capital assets.
Productivity in Sweden is relatively sensitive to business cycles
The TFP growth for the entire business sector largely reflects the development in GDP per hour worked. This means that we see a strong increase for TFP in Sweden during the periods 1995–2006 and 2010–2016. On the other hand, we note that the decline during the global financial crisis, 2007–2009, was greater in Sweden than in other countries. The decrease in TFP should not be interpreted strictly as an indicator of productivity as it also has cyclical reasons. This means that TFP decreases as a result of reduced demand, while the total number of hours worked and capital costs are not accordingly adjusted.
There are differences in productivity growth among sectors
The manufacturing industry has a higher average TFP growth than the average. This applies both before and after the financial crisis. At the same time, the negative development in TFP during the financial crisis is greater in the manufacturing industry. The large decrease is probably associated with the fact that the sector is largely dependent on exports and, therefore, severely affected by the international recession during these years. At the same time, we see that contribution from capital assets increases, which reduces TFP during the given years. On the other hand, this also means a higher capacity when demand recovers, reflected by a strong development over the following years.
We see a stronger development in TFP in the ICT sector than in other sectors both before, during, and after the financial crisis. This is the case in all the countries studied. However, Sweden had experienced comparatively weaker growth. This means that even if the ICT sector drives TFP growth in Sweden, it has a weaker development than in comparable countries. The weaker development in TFP in Sweden is partly due to labor productivity. Another explanation is a high contribution from labor composition and other capital assets, which means that a lower share of growth is reflected in TFP.
The construction sector reduces the average TFP growth in Sweden. However, in relation to comparable countries, it was strong during the period 1995–2006. Sweden had the largest decrease in TFP of all countries during the financial crisis. The general decrease is probably due to the economic situation and the fact that the pace of construction decreased. However, the negative development for Sweden continued during the period 2010–2016. The reasons behind this have not been clarified; however, compared with other countries, we see that the contribution of innovative assets is relatively larger during this period. This indicates that investments have taken place.
Intangibles have become more important
Tangible capital such as machinery and equipment contributed to a large part of the development in labor productivity for Sweden and several other countries during the period 1995–2006. Relative to material capital, however, intangible assets have become increasingly important in Sweden. Examples of intangibles are patents, databases, staff training, and design. We see that intangible capital has become more important as the contributions from economic competencies (for example brands and advertising) and databases has increased. At the same time, we see that the contribution of tangible capital has decreased. We see reduced contributions from tangible capital in all countries, but the increased contributions from economic competencies and databases is mainly observed in Sweden.
The increased importance of economic competencies means, among other things, an increased importance for human capital. We can only speculate about the reasons for this. However, the presence of more knowledge-intensive industries also means that the importance of tangible capital decreases in favor of intangible capital. Furthermore, a larger share of value added is created in services - for example post-market services - than previously. This is likely to change the relationship between tangible and intangible capital in favor for the latter.
Productivity growth and its driving forces
Serial number: Rapport 2021:09
Reference number: 2021/187