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Low productivity jobs driving employment growth in many OECD countries

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Weak labour productivity growth continues to mark the world’s advanced economies and risks compromising improvements in living standards, says a new OECD report.

In its latest Compendium of Productivity Indicators, the OECD says that the slowdown in labour productivity growth (measured as gross value added per hour worked) has especially affected manufacturing – both high tech activities such as computers and electronics, as well as industries requiring lower skill levels – and that gaps in labour productivity levels between large and smaller firms remain high.

And although economic growth in many countries has led to rising employment, particularly in Italy, Mexico, Spain, the United Kingdom and the US, the majority of new jobs are in activities with relatively low productivity.

The greater number of low productivity jobs has also weighed down on average wages across the economy as a whole. Real wages (adjusted for inflation) fell between 2010 and 2016 in Portugal, Spain and the United Kingdom. Although in some countries, such as Germany and the US, real wages have begun to rise in line with, albeit still slow, labour productivity growth in recent years, in many sectors wages continued to lag labour productivity growth. This was the case in one third of all sectors in Germany and the US.

“The long-term decoupling in wage and productivity growth we see in many OECD countries may also be driving inequalities in income and wealth,” the OECD’s Chief Statistician Martine Durand said. “Slowing productivity growth and the large number of low productivity jobs being created both limit the scope for improvements in material well-being.”

The share of income from economic activity going to labour through wages has declined in most countries in recent years, but most markedly in Hungary, Ireland, Israel, Mexico, Poland and Portugal.

The Compendium shows that by 2016, the latest year for which comparable international data is available, investment, an important driver of productivity growth, was beginning to pick up. However, investment rates, particularly on machinery and equipment and other tangible assets, were still below pre-crisis levels in many OECD countries.

Investment in intellectual property products, such as software and R&D, has been increasing since before the crisis, often at a faster pace than investment in physical capital but significant differences remain across countries. The share of total investment going to intellectual property in 2016 ranged from 1.1% in Colombia to 30% in Switzerland and 56% in Ireland.

The Compendium says the relatively robust investment in intellectual property, where the benefits to business may take time to feed through, may act as a catalyst for stronger economic growth in the future.

The OECD says productivity is ultimately a question of “working smarter” rather than “working harder”. This reflects firms’ ability to produce more output by better combining inputs through new ideas, technological innovations, as well as by way of process and organisational innovations.

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Thailand: Growth in Jobs Critical for Sustained COVID-19 Recovery

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Thailand’s economy was severely impacted by the COVID-19 pandemic and is estimated to have shrunk by 6.5 percent in 2020. Growth is projected to expand by 4.0 percent in 2021, according to Restoring Incomes; Recovering Jobs, the latest edition of the World Bank’s Thailand Economic Monitor,” launched today. The report stresses that sustained recovery in employment will be essential to helping the country bounce back in 2021 and 2022.

In 2020, weak global demand, the sharp decline in international tourist arrivals, and domestic mobility restrictions depressed goods and services exports and private consumption. Exports and private investment are estimated to have declined by 18.5 percent and 4.4 percent respectively, while household consumption declined by 1.3 percent.

The resulting declines in income have created economic hardship for many, though the Government has made good progress in implementing a substantial package of measures to support households and firms. Nevertheless, projections indicate that an additional 1.5 million people may have entered poverty in 2020 due to the economic impacts of COVID-19, based on a poverty line of US$5.50 (2011 PPP) per day.

This year, the economy is expected to recover gradually, despite the recent second outbreak of COVID-19, and growth is forecast to pick up further to 4.7 percent in 2022. However, the recovery remains vulnerable to downside risks, including from an extended resurgence of the pandemic resulting in a prolonged stagnation in tourism and domestic activity, a weaker-than-expected global recovery that could lead to continuing trade and supply chain disruptions, and high household debt levels.  

The pandemic’s impact has had a significant impact on Thailand’s labor market, with a particularly large increase in unemployment among young people. Hours worked fell, as did monthly incomes. Hours worked have not fully recovered, and employment in several sectors including manufacturing remains smaller than a year ago. This means the labor market is in a vulnerable position to confront any future shocks including a resurgence of COVID-19.

“The COVID-19 crisis and its economic impact have highlighted a key vulnerability for Thailand: the declining number of working-aged people, which compounds the challenge of recovering the economic losses of the last year,” said Birgit Hansl, World Bank Country Manager for Thailand. “Improvements in employment, productivity and labor incomes, especially among the poor, will be necessary for a sustainable recovery.”  

The report recommends that in the short term, the government put in place training programs to improve workers skills and provide financial support while they get back to work. Ongoing efforts are required to ensure that education and training matches the needs of employers.

In the longer term, the government can increase employment in the care sector, make childcare more accessible and decrease its cost to help increase female labor force employment. The report also recommends increasing the retirement age and putting in place performance-based compensation schemes and flexible working arrangements to extend the working lives of older people.

“The decline in the working age population will reduce labor supply and economic output over the coming decades. Good jobs will need to be created in high-productivity sectors associated with Thailand’s emerging knowledge economy. Policies to boost labor productivity and labor market participation of older people and women can help promote a sustainable recovery from COVID-19, while addressing challenges associated with an aging population,” according to Kiatipong Ariyapruchya, World Bank Senior Economist for Thailand.

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The World Needs to Wake Up to Long-Term Risks

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For the last 15 years the World Economic Forum’s Global Risks Report has been warning the world about the dangers of pandemics. In 2020, we saw the effects of ignoring preparation and ignoring long-term risks. The COVID-19 pandemic has not only claimed millions of lives, but it also widened long-standing health, economic and digital disparities. Billions of caregivers, workers and students – especially minorities who were disadvantaged before the pandemic – are now at risk of missing pathways to the new and fairer societies that the recovery could unlock. According to the Global Risks Report 2021, released today, these developments may further impede the global cooperation needed to address long-term challenges such as environmental degradation.

When it comes to technology access and digital skills, the gap between the “haves” and the “have nots” risks widening and challenging social cohesion. This will particularly affect young people worldwide, as this group faces its second global crisis in a generation and could miss out altogether on opportunities in the next decade.

Financial, digital and reputational pressures resulting from COVID-19 also threaten to leave behind many companies and their workforces in the markets of the future. While these potential disparities could cause societal fragmentation for states, an increasingly tense and fragile geopolitical outlook will also hinder the global recovery if mid-sized powers lack a seat at the global table.

Once again, environmental risks dominate by impact and likelihood, looking ahead towards the next decade. Societal fractures, uncertainty and anxiety will make it more difficult to achieve the coordination needed to address the planet’s continued degradation.

For the first time, the report also rates risks according to when respondents perceive they will pose a critical threat to the world. Clear and present dangers (0-2 years) reveal concern about lives and livelihoods – among them infectious diseases, employment crises, digital inequality and youth disillusionment. In the medium-term (3-5 years), respondents believe the world will be threatened by knock-on economic and technological risks, which may take several years to materialize – such as asset bubble bursts, IT infrastructure breakdown, price instability and debt crises. Existential threats (5-10 years) – weapons of mass destruction, state collapse, biodiversity loss and adverse technological advances – dominate long-term concerns.

“In 2020, the risk of a global pandemic became reality, something this report has been highlighting since 2006. We know how difficult it is for governments, business and other stakeholders to address such long-term risks, but the lesson here is for all of us to recognize that ignoring them doesn’t make them less likely to happen. As governments, businesses and societies begin to emerge from the pandemic, they must now urgently shape new economic and social systems that improve our collective resilience and capacity to respond to shocks while reducing inequality, improving health and protecting the planet. To help meet this challenge, next week’s event, The Davos Agenda, will mobilize global leaders to shape the principles, policies and partnerships needed in this new context,” said Saadia Zahidi, Managing Director at the World Economic Forum.

The report also reflects on the responses to COVID-19, drawing lessons designed to bolster global resilience. These lessons include formulating analytical frameworks, fostering risk champions, building trust through clear and consistent communication, and creating new forms of partnership. The key risks outlined in the report are complemented with recommendations to help countries, businesses, and the international community to act, rather than react, in the face of cross-cutting risks. The report closes with an overview of “frontier risks” – nine high-impact, low-probability events drawn from expert foresight exercises – including geomagnetic disruption, accidental wars and exploitation of brain-machine interfaces.

“The acceleration of the digital transformation promises large benefits, such as for example the creation of almost 100 million new jobs by 2025. At the same time however, digitalization may displace some 85 million jobs, and since 60% of adults still lack basic digital skills the risk is the deepening of existing inequalities,” said Peter Giger, Group Chief Risk Officer, Zurich Insurance Group. “The biggest long-term risk remains a failure to act on climate change. There is no vaccine against climate risks, so post-pandemic recovery plans must focus on growth aligning with sustainability agendas to build back better.”

“Economic and societal fallout from COVID-19 will profoundly impact the way organizations interact with clients and colleagues long after any vaccine rollout. As businesses transform their workplaces, new vulnerabilities are emerging. Rapid digitalization is exponentially increasing cyber exposures, supply chain disruption is radically altering business models, and a rise in serious health issues has accompanied employees’ shift to remote working,” said Carolina Klint, Risk Management Leader, Continental Europe, Marsh. “Every business will need to strengthen and constantly review their risk mitigation strategies if they are to improve their resilience to future shocks.”

“The pandemic in 2020 was a stress-test that shook the foundations of economies and societies worldwide. Rebuilding resilience to systemic shocks will require significant funding, international cooperation and greater social cohesion. Resilience will also hinge on the continued growth in connectivity worldwide, as we know that economies that digitized early performed relatively better in 2020,” said Lee Hyung-hee, President, Social Value Committee, SK Group. “If the continued deployment of 5G and AI is to emerge as an engine of growth, however, we must urgently bridge digital divides and address ethical risks.”

The Global Risks Report 2021 has been developed with the invaluable support of the World Economic Forum’s Global Risks Advisory Board. It also benefits from ongoing collaboration with its Strategic Partners Marsh McLennan, SK Group and Zurich Insurance Group and its academic advisers at the Oxford Martin School (University of Oxford), the National University of Singapore and the Wharton Risk Management and Decision Processes Center (University of Pennsylvania).

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Air travel down 60 per cent, as airline industry losses top $370 billion

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A new report from the UN’s air transportation agency confirms there was a “dramatic” fall in international air travel due to COVID-19, of around 60 per cent over the course of last year, to levels last seen in 2003.

The International Civil Aviation Organization (ICAO) said on Friday, that as seating capacity fell by around 50 per cent last year, that left just 1.8 billion passengers taking flights through 2020, compared with around 4.5 billion in 2019.

That adds up to a staggering financial loss to the industry of around $370 billion, “with airports and air navigation services providers losing a further 115 billion and 13 billion, respectively”, said ICAO in a press statement.

Grounded in March

As the coronavirus began its global spread, the air industry came to a virtual standstill by the end of March. Following widespread national lockdowns, by April the overall number of passengers had fallen 92 per cent from 2019 levels, an average of the 98 per cent drop-off seen in international traffic and 87 per cent fall in domestic air travel.

There was a moderate rebound during the summer travel period, but recovery was short-lived. “Sectoral recovery became more vulnerable and volatile again during the last four months of 2020, indicating an overall double-dip recession for the year”, ICAO said.

Disparity at home and abroad

The report notes “a persistent disparity between domestic and international air travel impacts resulting from the more stringent international measures in force.”

Domestic travel proved more resilient and was the main driver of any glimmer of recovery to the industry, particularly in China and Russia, ICAO notes, where domestic passenger numbers have already returned to the pre-pandemic levels.

Overall, there was a 50 per cent drop in domestic passenger traffic globally, while international traffic fell by 74 per cent, or around 1.4 billion passengers.

The plunge in traffic, has put the entire industry’s financial liability into question said ICAO, and threatens the viability of millions of associated jobs around the world.

Tourism in crisis

It has also severely impacted global tourism, given that more than 50 per cent of international travellers used to reach their destinations by plane.

ICAO said that the regional breakdown in losses showed a $120 billion loss year-on-year in the Asia-Pacific region, $100 billion in Europe, $88 billion in North America, followed by $26 billion, $22 billion and $14 billion in Latin America and the Caribbean, the Middle East, and Africa, respectively.

The agency described the near term outlook as one of “prolonged depressed demand, with downside risks to global air travel recovery predominating in the first quarter of 2021, and likely to be subject to further deterioration.”

It does not expect any improvement until the second quarter of 2021, athough this will still be subject to the effectiveness of pandemic management and vaccination roll out across the world.

Best-case scenario

In the most optimistic scenario, said ICAO, by June of 2021 passenger numbers will be expected to recover globally to 71 per cent of their 2019 levels (or 53 per cent for international and 84 per cent for domestic flights). A more pessimistic scenario foresees only a 49 per cent recovery (26 per cent for international and 66 per cent for domestic).

ICAO will continue to provide recommendations and support for the aviation sector to weather the crisis. Its new Guidance on Economic and Financial Measures summarizes a range of measures that can be explored by States and the industry to ease the crisis, and strengthen the industry to withstand future shocks better.

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