Productivity is commonly defined as a ratio between the volume of output and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is a key source of economic growth and competitiveness and, as such, internationally comparable indicators of productivity are central for assessing economic performance.

Productivity is a key source of economic growth and competitiveness and, as such, internationally comparable indicators of productivity are central for assessing economic performance. Productivity is commonly defined as a ratio between the volume of output and the volume of input(s). It measures how efficiently production inputs, such as labour and/or capital, are being used in an economy to produce a given level of output.

Prior to the COVID-19 crisis, considerable attention focused on the long-term productivity slowdown observed across countries. This was referred to as the productivity paradox, as the productivity slowdown occurred at a time of significant technological change. The focus on productivity is expected to resurface and gain prominence, once the recovery from the COVID-19 crisis is fully underway.

Industries differ from each other with respect to their own productivity growth and their contribution to overall productivity growth. Such differences relate, for instance, to the intensity with which industries use skilled labour and capital in their production, the scope for product and process innovation, the absorption of external knowledge, the degree of product standardisation, the scope for economies of scale, and the exposure to international competition through their participation in global value chains.

Focusing on relatively aggregated industries can mask the heterogeneity in productivity among firms within the same industry and, in particular, the contribution of small and medium-sized enterprises (SMEs). In a number of countries, a fat tail of low-productivity firms (composed in large part of small firms) co-exists with large firms, which are very productive and exposed to international competition. To the extent that large firms can exploit increasing returns to scale, productivity tends to increase with firm size. However, new small firms are often found to spur aggregate productivity growth as they enter with new technologies and stimulate productivity-enhancing changes by incumbents.

Breaking down investment and capital by asset type helps to better understand what are the main drivers of GDP and productivity growth. For example, it allows assessing the state of the infrastructure and the volume of investment in growth-enhancing technologies, such as ICT, in a country. Moreover, different asset types contribute in different ways to GDP and productivity growth. As explained in the Chapter on , capital services are the appropriate measure of capital input in productivity analysis and their measurement depends on the composition of the capital stock.

Labour income is the most direct mechanism through which the benefits of productivity gains, and thus economic growth, are transferred to workers. Indeed, employers’ ability to raise wages and other forms of labour income depends on increases in labour productivity, highlighting the welfare implications of productivity growth and its role as the main driver of long-term living standards. However, empirical evidence has pointed to a decoupling of labour productivity growth from growth in real labour income in a majority (around two thirds) of OECD countries since the mid-1990s. The decline in labour income shares observed in these countries precisely reflects this decoupling between real labour income and labour productivity.

Physical distancing, lockdowns and restrictive measures put in place worldwide to contain the COVID-19 pandemic triggered the most severe and abrupt global recession since the end of the Second World War. Admittedly, GDP declines recorded in 2020 were heterogeneous across OECD countries, reflecting the uneven impact of the pandemic throughout the economy, differences in economic specialisation, variations in the nature and timing of restrictions, and differences in fiscal and monetary policy across countries. However, (quarterly) GDP declines exceeded almost everywhere those recorded at the time of the 2007-09 financial crisis, often referred to as the Great Recession.