We have reached a pivotal moment for the world economy. Eight years on from the start of the financial crisis, weak trade growth, sluggish investment, weak demand, and a slowdown of economic activity in emerging economies continue to drag on global growth. As policy makers face up to the realities of an ever more complex and interconnected world, there is a need to look again at how our policy frameworks are configured in order to address multiple challenges. The moment is ripe for new solutions, and the first step has to be putting people’s well-being back at the centre of the policy efforts. In the spirit of the OECD’s New Approaches to Economic Challenges (NAEC) project and the All on Board for Inclusive Growth initiative, this is precisely what this report on the Productivity-Inclusiveness Nexus sets out to achieve.

Eight years on from the start of the economic and financial crisis, the international economic context remains challenging, with growth still modest in advanced economies and continuing to slow in key emerging markets. While this weakness is in part cyclical, reflecting the realities of the post-crisis environment, it also results from a worrying slowdown in productivity growth which predates the crisis. Indeed, some 90% of OECD countries experienced a decline in trend labour productivity growth after the turn of the millennium, and the slowdown has now also spread to emerging market economies, despite their comparatively low productivity levels and continued scope for catch up.

Why has aggregate productivity growth slowed across OECD countries and emerging economies over recent years? What was the relative importance of structural and cyclical factors in driving this trend? This chapter sets out to answer these questions by examining the evolution of the great productivity slowdown that has taken place in OECD countries since the turn of the millennium, and subsequently spread to prominent emerging markets. It highlights the paradox of slowing aggregate productivity at a time of fast technological change before going on to consider possible causes of this phenomenon. In particular, it looks in greater depth at the role played by the divergence in productivity performance between global frontier firms and poorer-performing nonfrontier firms, and at the pronounced discrepancies between the productivity growth rates of different regions. The chapter suggests that structural policy settings limiting competition may have been an important contributor to the trends described.

What lies behind the increase in income inequality in most advanced countries over the last three decades? What is the picture in key emerging economies? Has the growth of income inequality been mirrored by rising inequalities of wealth, well-being and opportunity? This chapter charts the drastic rise of income inequality in OECD countries since the 1980s, examining the key drivers over the short and longer term with a focus on the role of technological change, reforms to labour market institutions and the advance of globalisation. The chapter also considers the more heterogeneous picture found in key emerging economies where overall, despite declines in some places, inequality remains at very high levels. It then goes on to explore trends in inequalities in wealth and such important determinants of well-being as access to employment, education outcomes and health. Finally, the chapter looks at how multidimensional inequalities tend to be mutually reinforcing, as is suggested by their concentration in disadvantaged areas.

Why has the great slowdown in productivity growth played out against a backdrop of rising inequality? Are declining productivity growth rates and increasing inequality linked? Are there policies that could address both trends? Building on existing OECD work, this chapter brings a new analytical perspective and the latest empirical evidence to bear in order to elaborate the potential links between rising inequalities and slowing productivity growth. The chapter explores possible feedback loops between productivity and inequality. It examines how inequalities amongst individuals (and regions) in areas like income, access to education and training, health care, quality jobs and new technologies tend to hinder aggregate productivity growth by reducing human capital accumulation, increasing the under-utilisation and misallocation of resources in the economy, and ultimately slowing the diffusion of innovation.

How can policy-makers address the Productivity-Inclusiveness Nexus? What is the best way to promote synergies between faster productivity growth and greater inclusiveness? How can compensatory measures be employed to deal with trade-offs? This chapter sets out the beginnings of a policy framework to address the multiple interactions between inequalities and productivity and how these interactions play out across countries, regions, firms and between individuals. The overarching aim of the chapter is to provide guidance for policymakers on how to ensure that all individuals, firms and regions are empowered to both contribute to and benefit from improved productivity growth. It begins by examining how policy can support individuals as they strive to fulfil their productive potential, before looking at how policy can help all firms to become more productive whilst also promoting inclusive growth. It then goes on to consider how changes to policy-making at the local and regional levels can make a difference, before finally exploring the need for strong public governance, including a whole-of-government approach to avoid piecemeal policymaking and unintended consequences.