by David Brackfield, Joaquim Oliveira Martins
Most narratives of the crisis start with problems in the financial sector that then spilled over into the real economy. This column looks at the real side first and shows that labour productivity growth declined significantly in the years prior to the crisis, particularly in the US construction sector. Financial markets may have failed in that they didn’t detect the deterioration of structural productivity trends in the early 2000s.
Discussions about the current crisis often present events in a sequence, such as that the US sub-prime crisis in August 2007 triggered a major inter-bank credit crisis, which transformed itself into a general credit crisis, the latter having an impact on the real economy and overall business and consumer confidence. However, it is interesting to investigate what was actually happening to the real sector, especially productivity trends, in the major OECD member economies before the crisis. An issue with productivity data, notably multi-factor productivity (MFP), which is a measure of technical progress, is that these data are available with some delay (typically a one- to two- year lag). Nevertheless the data we present below make it clear that labour productivity growth was already slowing down well before the crisis. In particular, the US construction sector, underpinned by loose credit arrangements underpinning, had displayed dismal and worsening productivity performance since 2002.
The vanishing productivity gap
Figure 1 shows annual labour productivity growth in the US, Europe, and Japan since 1997. The US has historically maintained a higher productivity growth rate than Europe, which has usually been attributed to labour conditions (hiring and firing), product market regulation, and the uptake of technology. A striking feature of the graph is the downward convergence to low growth by 2007, which could be dubbed “a race to the bottom”. . It is important to note that this convergence happened before the start of the crisis –the US experienced a labour productivity growth decline since 2004.
Figure 1. EU, US, and Japanese productivity growth 
Source: OECD ULC Database
Continue reading Gastbeitrag: Productivity and the crisis: Revisiting the fundamentals
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