Being able to afford things, having free time, enjoying a social safety net, living in a healthy environment – there are many facets to welfare. Not all of them can be fully captured by economic indicators. But to maintain a high standard of living, we need to produce goods and services efficiently, which means using resources sparingly.

If goods and services can be produced using less labour, labour productivity increases. This gives individuals scope for shorter working hours or higher wages. More productive economies are better positioned to finance a high level of public services, such as universal access to state-of-the-art medicine.

In the long term, productivity hinges, above all, on technological progress – that is, new ideas, innovation and improved processes. In the past, innovations such as the development of the steam engine and the advent of electrification have radically changed production. They were followed by major leaps in labour productivity and higher standards of living.

For some time now, though, productivity growth has been declining in many advanced economies. At the same time, we are seeing the rapid spread of digital technologies, such as greater robotification or the increasing use of digital platforms. What is more, new technologies like artificial intelligence and the Internet of Things are all set to be rolled out for a wide range of applications.

But how do the wave of technological advancements and the slump in productivity fit together? Does digitalisation actually lead to greater productivity?

Bundesbank experts have examined the impact of digital transformation on labour productivity in major euro area countries and the United States between 1997 and 2018. What they found is that the production and use of digital goods such as software and telecommunications technology lent a major boost to labour productivity.

Efficiency gains were routinely much greater for producers of digital goods than in the rest of the economy. These include manufacturers of software and hardware as well as IT service providers. Although they account for only a relatively small share of aggregate value added, contributing less than one-tenth in each of the countries analysed, they are still material to the development of aggregate labour productivity given their immense efficiency gains. Without these gains, our analysis shows that productivity growth in the United States, Germany and France would have been significantly lower.

Digital technologies are produced in a relatively small sector of the economy, but they transform products and processes in other sectors as well: sensors help to save on fuel and hours of labour when harvesting grains, and new software eases the administrative burden on bakeries. These kinds of digital inputs play an enormous role in increasing labour productivity through digitalisation.

However, the impetus for digitalisation appears to have diminished during the period under analysis. The reasons for this are unclear at first. It is possible that general-purpose technologies such as artificial intelligence and quantum computing may require additional innovation and investment before they can be functionally integrated into day-to-day business operations. If that is the case, substantial productivity gains could still lie ahead. 

One thing is clear, however: for firms to be in a position to fully leverage the potential offered by digitalisation and to spark further innovation, the conditions have to be right. Stable prices are one element of an environment that is conducive to investment. The Governing Council of the ECB is determined to tame the high level of inflation. As things stand today, interest rates will have to rise further in order to bring the inflation rate back to 2%.

However, other aspects that make conditions attractive include a well-developed digital infrastructure and regulation that supports innovation with clear rules for the use of data and AI systems. And we need suitably qualified employees. After all, the digital transformation is not only leading to the automation of tasks, but is also ushering in a host of new job profiles and positions.

Education is key to ensuring that the transition is taken primarily as an opportunity and not perceived as a threat. Systematic education and training will allow people to keep pace with the rapid advancements being made. Learning therefore needs to be a firm fixture in our professional lives. The government can also help to mitigate particular hardships stemming from digital change through its social safety net.

And it can do even more: an efficient and modern administration means digital opportunities can be seized more readily. It should offer and run as many of its services as possible online. In its latest economic survey of Germany, the OECD points out that digitalising the public administration makes it easier to introduce digital technologies in the private sector.

There are thus a raft of approaches to give productivity new lift on the tailwinds of digital transformation. Rapid progress in areas such as artificial intelligence and quantum computing call upon all of us to act: firms need to invest, employees need to keep training, the government needs to set the right framework and mitigate social hardships. But these advancements also suggest that the positive potential of digital technologies is still far from being exhausted. That is good news for our future welfare – in all its facets.

Translation provided by the Deutsche Bundesbank.