EconPol Europe: Financial incentives and investment into digital skills essential for productivity growth

Providing financial incentives for companies to invest in productivity-enhancing technologies and practices is the key to productivity growth, according to a new report from EconPol Europe.

Strong investment should also be made into training and workforce skills to exploit the productivity potential of new business models in the digital economy, say the report’s authors Cecilia Jona-Lasinio (ISTAT and LUISS Guido Carli), Stefano Schiavo (University of Trento) and Klaus Weyerstrass (Institut für Höhere Studien).

Competition policy, although not directly related to productivity, is also emerging as an important tool to shape incentives and foster the efficient allocation of resources both across and within sectors and firms. Productivity growth is generally higher in industry than the services sector, note the authors, who say that strengthening the production sector would also support productivity advancement in Europe. Empirical evidence shows that openness to foreign trade and foreign direct investment is also supportive to productivity growth.

The slow pace of productivity growth in Europe is a major source of concern for policy-makers, as productivity is a key determinant of living standards. The report analyses the recent trends in labour and total factor productivity in the EU and beyond and identifies factors that influence productivity. Authors also assess the relationship between competition, market power and productivity.

It finds that the presence of substantial heterogeneity among firms both within and across sectors and countries suggests that the same policy interventions can have very different effects on different groups of companies, and not all agents will react in the same way to policy measures.

The imperfect knowledge about the key drivers of productivity and, above all, of the lags with which the economic system responds to policy shock calls for an experimental and tailor-made approach that addresses the most pressing bottlenecks affecting countries and sectors while refraining from a one-size-fits-all attitude.

Read the full report: EconPol Policy Report 13