A woman with a tablet in a data center ©Adobe Stock / Gorodenkoff

Monthly Report: Impulses from digital sectors are crucial for labour productivity developments

What is the significance of digitalisation for the growth of aggregate labour productivity? This is the key question posed in an article in the current issue of the Bundesbank’s Monthly Report. The Bundesbank’s experts study the impact of digital transformation on labour productivity in France, Germany, Italy and Spain as well as the United States between 1997 and 2018. They find that productivity effects emanating from the digital sectors are very strong, with input-output linkages between economic sectors playing an important role. 

Why is labour productivity so significant for the economy?

Labour productivity, defined as the ratio of production to labour input, is a key indicator of economic efficiency. Trend patterns of labour productivity can provide insights into the growth potential of an economy. Owing to its close link to per capita income, labour productivity is therefore often also interpreted as a measure of prosperity. For some time now, productivity growth has been minimal in many industrial countries, despite the rapid spread of digital technologies, which are generally credited with having the potential to sustainably increase labour productivity. 

Digital sectors are of major importance

Total factor productivity betweem 1997 and 2018

Efficiency gains in digital sector labour productivity constitute the starting point of the analysis. Progress made in the digital sectors is frequently much greater than that made in the rest of the economy. The economists use the development of total factor productivity (TFP) as a measure of efficiency gains. It captures the share of productivity growth that cannot be explained by a change in labour or capital input, and, in particular, reflects technological progress.

Using macroeconomic models, the Bundesbank’s experts then examine the significance of efficiency gains in the digital sectors for aggregate labour productivity. They find that, excluding TFP advances in the digital sectors, aggregate labour productivity growth would be much weaker, despite the relatively small share of aggregate value added attributable to the digital sectors. For the United States, around seven-tenths of productivity growth would be lost. The loss would be substantial in Germany and France, too, at one-half and four-tenths respectively. 

Importance of digital sectors for aggregate labour productivity

Previous studies neglect digital inputs

A further finding of the analysis is that digital inputs play a very important role in how much digital change influences labour productivity developments. Digital inputs refer to digital goods consumed, processed or converted in the production process, such as microprocessors. The Bundesbank’s experts stress that if digital inputs are neglected, the contribution to productivity growth made by digitalisation is greatly underestimated because digital change influences labour productivity through various channels. However, studies to date often focus only on investment in digital goods – such as computer hardware – as a transmission channel.

Has the pandemic fuelled digitalisation?

The Bundesbank experts’ analysis also shows that the impact of digitalisation lessened in the period under review from 1997 to 2018. There are a number of different approaches to explaining this. Critics argue, for instance, that digital technologies are essentially less transformative than generally assumed. They claim that digital technologies do not afford the same potential for major productivity gains as previous waves of innovation, which were initiated, for example, by the development of the steam engine or electrification. From the point of view of “techno-optimists”, technological progress is generally still intact. According to this group, however, it takes time for new technologies to proliferate, to be integrated into production processes and for their effects to fully unfold. 

It remains to be seen whether a turning point has been reached as a result of the significant increase in the use and diffusion of digital technologies during the coronavirus pandemic. At any rate, the European Commission’s indicators on the use and diffusion of digital technologies indicate a significant increase during the pandemic. However, experts are not yet able to quantify the extent to which this has led to measurable efficiency gains. But surveys of enterprises yield an optimistic assessment in this regard.