Let’s not overdo the productivity pessimism

Economists disagree on lots of things, but on one thing at least there is a consensus. Productivity, or the efficiency of production, is the main driver of human welfare. The data bear this out. Consider that growth in living standards in the UK since the late nineteenth century has been driven entirely by rising productivity. It is not surprising that improving productivity is the Holy Grail of economic policy.

This is why the stagnation in productivity growth since the financial crisis represents such a challenge. Stagnating productivity means stagnating living standards and public services. To some such outcomes calls into question the legitimacy of the economic system. There are four broad explanations for what has gone wrong:

The first relates to the lingering effects of the global financial crisis. Weak wage growth is likely to have reduced the incentives for firms to undertake productivity-raising investment. Faced with an uncertain world workers are sticking with their jobs for longer, slowing the diffusion of knowledge and skills across the economy.