PRODUCTIVITY AND PUBLIC SECTOR PERFORMANCE

Christian Kastrop Director – Policy Studies Branch Economics Department, OECD

11th ANNUAL MEETING OF THE OECD SENIOR BUDGET OFFICIALS PERFORMANCE AND RESULTS NETWORK

Paris, 26 November 2015

• The share of services in economic activity (both

domestic value added and trade) has been rising

sharply.

• Public services at large (including health,

education, SOEs) will become increasingly

important for aggregate productivity in the context

of ageing and skill-biased technical change.

• How does recent OECD research on productivity

developments in the private sector inform our

thinking about productivity in the public sector?

Background

• Productivity: now more than ever

• Productivity: what’s wrong?

– Broken diffusion machine

– Misallocated resources, especially skills

• Productivity: questions for the public sector

Roadmap

I. Productivity: now more than ever

Differences in GDP per capita mostly

reflect labour productivity gaps Percentage differences compared with the upper half of OECD countries

Productivity isn’t everything but in the long run its almost everything – Paul Krugman (1994)

But aggregate productivity growth

slowed, even before the crisis Labour productivity growth since 1990

GDP per hour worked (China and India refer to GDP per worker)

Big worry since future economic growth will largely depend on productivity growth, partly due

to slowing educational attainment

Productivity and innovation more than

jobs will be the key driver of growth

Ageing populations reduce scope to grow through an increasing labour force

Innovation and technology spillovers will increasingly drive growth

Increasing education and skills of workers will be key

Allocating resources to high productivity firms and matching skills to jobs will also be crucial 7

II. Productivity: what’s wrong?

The breakdown of the diffusion

machine Average of labour productivity across each 2-digit sector (log, 2001=0)

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro

evidence from OECD countries”, OECD Productivity Working Papers No. 2.

Diffusion is esp. challenging in market services, which are less exposed to global competition

Diffusion is likely to be even more difficult in public services given their non-market nature

• Four factors can enable productivity diffusion:

1. Global connections: trade, FDI, participating in GVCs, international mobility of skilled workers

2. Investments in knowledge based capital – R&D, managerial capital

3. Efficient allocation of resources, especially skills

4. Appetite for risk and experimentation

• Each factor is connected to competitive pressure in some way.

• How do we achieve the diffusion of new technologies and best practices in the public sector, given the inherent rigidities and the natural lack of competitive pressure?

What drives diffusion?

• OECD projections show a slowing in human

capital accumulation over coming decades

maximising human talent and its efficient use in

the workplace will be key.

• BUT the allocation of human talent in OECD

countries is far from perfect:

– Skill mismatch affects ¼ workers in the OECD

countries, with significant costs to productivity.

Maximising human talent is key

Productivity gains from reducing skill

mismatch to the best practice level

Differences in skill mismatch can account for one-fifth of the labour productivity gap between Italy and the US.

Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity:

evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.

• Skill mismatch is lower when:

1. Barriers to the firm entry and exit are lower

2. Barriers to labour mobility are lower

3. Managerial quality is high

4. Workers can engage in lifelong learning

• To what extent can the public sector replicate these features to ensure a more efficient matching of skills to jobs?

• What are the specific rigidities that stifle mobility and matching in non-market services and what can policy do about them?

What drives skill mismatch?

• Better measuring productivity is a prerequisite for improving

public sector performance. What best practices can be

followed?

• How do we promote the diffusion of cutting edge ICT-

related technologies and applications (including big data) to

the public sector?

• How do we improve managerial performance in the public

sector and the governance of state-owned enterprises?

• How do we improve the allocation of human talent in the

public sector?

Productivity in the public sector:

some key questions

New book:

out now!

Available at:

http://www.oecd.org/economy/the

-future-of-productivity.htm

Book + 5 page policy note +

technical paper + videos

Authors:

Muge Adalet McGowan

Dan Andrews

Chiara Criscuolo

Giuseppe Nicoletti