Labour productivity has dropped markedly in the developed world since a couple of decades. The trend of stagnating productivity is a trend prevalent in Europe and in the US. In the US, expansionary macroeconomic policies and the early embrace of the ICT revolution have softened the productivity decline.
Still, this slowdown reduces potential growth and living standards. For Luxembourg, the situation is even worse. Due to its specialization in communication and financial services, the Grand Duchy shows high GDP per capita but stagnant labour productivity. This advantage is eroding, and neighbouring regions are catching up.
Why productivity matters so much
Productivity is the ratio of value added created by companies to the number of hours worked. Value added turnover minus the cost of purchased goods, becomes income for employees, owners, banks, and the Treasury. High productivity means high income per head (€157.700 per employee in Luxembourg in 2024). Labour productivity drives living standards and wellbeing. It also determines unit labour costs, the basis of competitiveness. Furthermore, productivity plays a role in climate change. For instance, energy productivity (value added per Kwh) indicates how well economic growth decouples from emissions.
High productivity but quasi-stagnation
Numerous academic studies link the slowdown to factors like aging working populations, reduced investment in equipment, R&D, and innovation, inadequate skills, and excessive incumbent market power.
The National Board of Productivity (NPB), set up in 2018, has published five reports on the issue. Low private immaterial investment (R&D, innovation, management) is a key factor. Many small companies fail to scale and fully benefit from the Internal Market. Company level data reveals a mix of dynamic, technology frontier firms and others stagnating. Even the high-productivity financial sector is backsliding.
Plans to boost Artificial Intelligence
Recent studies suggest that AI, including large language models like ChatGPT, may lift productivity. Estimated annual gains range from 0.08 points (Nobel Prize winner Daron Acemoglu) to 1.24 points (Philippe Aghion).
“Recent studies suggest that AI, including large language models like ChatGPT, may lift productivity”
The NPB has recommended a strong support for AI. This was recently endorsed by the Chamber of Commerce and the Government in new measures promoting AI, quantum computing and better access to data.
Future surveys will show whether these policies boost AI adoption, which currently remains below 15% among companies.
This article was published in the 6th edition of Forbes Luxembourg.
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