Economists have long been puzzling over why productivity has downshifted over the past decade, often blaming waning technological innovation for the pullback. New research, though, points to an overlooked culprit: the shortage of credit to many companies that followed the financial crisis.
Productivity is how much a worker can produce per hour and is the main source of rising standards of living. Its growth has slowed sharply around the world since the financial crisis. Because what employers can pay is closely linked to...
Economists have long been puzzling over why productivity has downshifted over the past decade, often blaming waning technological innovation for the pullback. New research, though, points to an overlooked culprit: the shortage of credit to many companies that followed the financial crisis.
Productivity is how much a worker can produce per hour and is the main source of rising standards of living. Its growth has slowed sharply around the world since the financial crisis. Because what employers can pay is closely linked to how much workers produce, this weak growth is a reason for slow wage gains.
Tight credit conditions and balance-sheet vulnerabilities could be responsible for as much as one-third of the productivity slowdown in advanced economies following the 2008 global financial crisis, according to an International Monetary Fund research paper by Gee Hee Hong, Romain Duval and Yannick Timmer. This slowdown has swept across nations like Japan, the U.S. and France.
Firms often raise worker productivity by investing in new buildings, equipment, software and research. Firms that rely on the financial markets may not have been able to fund such investment when credit became scarce after the crisis.
The IMF paper shows firms whose balance sheets were saddled by debt saw a larger slowdown in total factor productivity growth—which accounts for effects of inputs like capital and labor—than their more financially fit counterparts.
These firms were more likely to cut back on investment like research and development, hurting productivity.
The lackluster productivity was worse in countries where credit conditions tightened more right after the collapse of Lehman Brothers in September 2008.
The study has cross-cutting implications for the future of productivity growth. On the positive side, companies no longer have much trouble getting credit, as U.S. corporate debt is ballooning to levels higher than those just before the 2008 financial crisis. That could, in turn, help productivity, if it makes it easier for firms to finance R&D and workforce training.
That hasn't happened yet: U.S productivity growth was zero in the first quarter, according to the latest Labor Department figures.
On the negative side, very high levels of corporate debt could once again undermine firms' ability to invest in the event of another crisis or credit crunch. The risks of a corporate debt pileup are evident in the case of oil drillers, who were initially attracted to the bond market by ultralow interest rates. The oil-price plunge, however, spurred a wave of defaults among smaller oil and gas drillers.
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