De-industrialization and the Great Productivity Slowdown: What Comes Next?

Productivity growth in advanced economies has been slowing internationally for many years. Despite much academic research, there is no consensus on why. Many researchers assume a break in productivity growth around 2007-09. This article argues that there was no such break. Rather, the slowdown is a much longer-term phenomenon and is largely an inevitable consequence of de-industrialization. Unfortunately data measurement – especially of productivity – remains biased towards a now small manufacturing sector, rather than the dominant services and digital sectors. Whatever policies are pursued, manufacturing will continue to shrink as a share of value-added and the measured productivity growth trend will continue to slow. Policy needs to look forwards, not backwards. That means a focus on welfare improvements, not GDP growth and investment in the new technologies and growing sectors, not a doomed fight to restore the manufacturing glories of the past. Investment policies should support critical digital networks, especially to support services such as health and education which are key to productivity in the services sector. Investment is also needed in the transition to net zero to address the climate crisis. These developments would be growth positive and may stem the measured productivity slowdown for a time.