productivity slowdowns and inequality speedups: what is the role of intangibles?

Productivity slowdowns and inequality speedups: what is

the role of intangibles?

Jonathan Haskel, Imperial College Business School, Imperial College, London

www.imperial.ac.uk/people/j.haskel

@haskelecon; j.haskel@imperial.ac.uk

2016 Conference of the Global Forum on Productivity: Structural Reforms for Productivity Growth

Session 1: Sources and implications of the productivity slowdown, 7-8 July 2016 - ‌Lisbon, Portugal

Features work from: SPINTAN (EUgrant No. 612774 ) with Carol Corrado, Cecilia Jona-Lasinio;

Book project with Stian Westlake www.theintangibleeconomy.com

Pre-crisis

Post-crisis

And back in the UK…

Multiple crises confronting the world economy….. • Secular stagnation

• Financial regulation

• Inequality

• Political instability

• …need answers from Economists

• Two institutions leading the way…

And

Source Chiara Criscuolo, 2015, https://hbr.org/2015/08/productivity-is-soaring-at-top-firms-and-sluggish-everywhere-else

The facts that need explaining

• Low investment with very low borrowing costs: secular stagnation? (Summers)

• Low productivity growth (Gordon)

• Wage inequality rise (Katz, Autor, Piketty)

• Company inequality rise (OECD)

• (Political disaffection? OECD Productivity and Inclusiveness Nexus)

Preliminaries: have we made any progress on understanding the labour productivity slowdown?

• Is the productivity slowdown “Keynesian”? • Depressed animal spirits =>

• investment slowdown =>

• workers have less capital to work with =>

• Labour productivity slowdown

• What do the Conference Board say?

Source: The Conference Board Total Economy Database, 16 developed countries covered by the Conference Board Total Economy Database. Countries are Austria (AUT), Belgium (BEL), Czech Republic (CZE), Denmark (DNK), Finland (FIN), France (FRA), Germany (GER), Hungary (HUN) Ireland (IRL), Italy (ITA), Netherlands NLD), Portugal (PRT), Spain (ESP), Sweden (SWE), United Kingdom (UK) and the United States (USA).

Ok, so it’s a TFP slowdown..

• But that’s just finance and a big shock right?

…or fundamentally weak economies?

Two other preliminaries

• Rise in company inequality • Before the great recession

• Rise in income inequality • For most (US) workers,

stopped rising in 2000

• Workers who have done better have been in firms who have done better i.e. higher-paid workers are in firms with higher-paid co-workers

Source: Song et al, (2015)

The facts that need explaining, revisited

• Low investment with very low borrowing costs: secular stagnation? • Low total factor productivity growth, including in some of the successful

economies e.g. Scandinavia. • Wage inequality rise (before great recession) • Company productivity inequality rise (before great recession, and paying all

worker types higher wages)

• We also know that economies are getting more intangible intensive and did so before the great recession.

• Question : what is the role of intangibles, if any, in explaining these facts?

Intangible investment programme attempts to understand economies…

Which used to produce this…

…and now produce this.

Investment has changed From this…. To this…

Computerized Information

Innovative Property

Economic Competencies

• Software development • Database development

• R&D • Mineral exploration • Copyright development (artistic originals) • Design and other product development costs

• Market research & advertising • Business process investment • Training & skill development

Intangible Assets

Broad category Type of Investment

Forms of IPRs:

• Patent • License • Copyright • Design IPR • Trademark

IPRs/Codified knowledge

Organizational

Type of Capital

Source: Corrado, Hulten and Sichel, 2005, 2009 and Carol Corrado, OECD/MIT presentation, NAS, December, 2012

Properties of intangibles • (At least some) not measured in GDP.

• Implication: GDP too low since investment undermeasured. GDP and TFP growth slows down if unmeasured investment is higher than measured GDP growth.

• Properties of intangibles- the four “S”s (Lev, CHS, Haskel/Westlake) • Sunk • Scalable • Spillovers • Synergies • Implications:

• Sunk: financing difficulties • Spillovers: if intangible investment falls, TFP growth falls; and by more in intangible-intensive

economies • Scalable: intangible-intensive companies get relatively larger => frontier gap gets bigger • Synergies: potentially large wage gains for intangible capital owners

• Do mismeasurement and 4S properties of intangibles help explain the data?

What has happened to investment over the Great Recession?

Source: Figure 7, of OECD (2015), The Future of Productivity., based on www.intan-invest.net

The OECD were the first to spot this…

The pattern of investment has changed…with tangibles not recovering but intangibles more resilient…

Source: Author calculations, using SPINTAN database

And the EU is lagging …

Source: Author calculations, using SPINTAN database

Spillovers: the slowdown in R&D capital growth correlated with slowdown in TFP growth…

Mis-measurement: R&D spend slowed, but GDP slowed more, so value added growth understated: correlated with slowdown in TFP growth…

Implications of intangibles: spillovers and mis-measurement

Source: The Conference Board Total Economy Database and www.intan-invest.net

Theory predicts greatest impact in most intangible-intensive countries…

Source: The Conference Board Total Economy Database and www.intan-invest.net

Implications of intangibles: scalable

• Are intangibles worsening the productivity gap between leading firms and laggards? (Haskel and Westlake)

• Tangible-intensive industries

• constant returns, • successful companies expand, but are no more productive. Frontier gap stays the

same

• Intangible-intensive industries, scalable, • Increasing returns • successful companies expand and get more productive. Frontier gap widens

• Test: Productivity gap should widen in more intangible-intensive industries

Finding: productivity spread has risen the most in intangible-intensive industries. And if these firms pay higher wages to all workers, wage inequality rises too.

Source: Haskel and Westlake, 2016, using data from SPINTAN and Distributed Microdata project

Growth and inclusiveness : Haskel/Westlake why the intangible economy makes people vote for Brexit

• It was the economy…

https://next.ft.com/content/1ce1a720-ce94-3c32-a689-8d2356388a1f

http://www.resolutionfoundation.org/wp-content/uploads/2016/06/brexit2-1.png

…but was it?

..it was also values?

• “Traditional” values versus “cosmopolitan” values • Cosmopolitan values? From

psychology literature maybe associated with personality traits: • openness to experience. • agreeableness

• Are these the types of workers who

can potentially succeed in an intangible economy (benefit from spillovers and synergies)?

Summary • Key facts to explain

• TFP slowdowns and inequality speedups • TFP falls are in some of the most previously successful countries e.g. Scandinavia.

• Are intangibles part of the story? • Intangible investment fell in Great Recession, then grew more slowly • But recovered faster than tangibles and GDP

• Implications • GDP growth too low since investment more mis-measured => TFP growth falls • Fewer spillovers => TFP growth falls • And: both effects magnified in intangible-intensive countries • Intangible-intensive firms scale up and frontier breaks away

• Political economy: are we leaving certain worker types behind? Who won’t support globalisation?