The productivity and equality nexus

OECD Chief of Staff and Sherpa to the G20/G7

Productivity growth has slowed since the crisis and inequality of income and opportunity has been getting worse. Could they be impacting each other?

The linkages between the productivity and inequality challenges we face are still to be fully explored. Ultimately, each challenge may have its own solution, but the nexus of relationships that exists between productivity and inequality policies and outcomes means that there is also increasingly good reason to think that our efforts would benefit from a common approach.

For a start, OECD research has found that high levels of inequality may impact growth negatively by causing a lack of investment in human capital among low income families. This could also affect productivity growth in our economies. At the same time, weak competition frameworks in the digital and knowledge-based economies may unleash “winner takes all” dynamics, or worse still, persistent rent-seeking behaviour on the part of incumbents. Our analysis also suggests that wage dispersion between firms, which reflects diverging rates of productivity growth, has in many cases contributed to rising inequality of incomes between workers. On top of this, the “financialisation” of our economies may have created incentives for short-term profit maximisation, at the expense of adequately channelling resources to the more productive activities.

In the spirit of our New Approaches to Economic Challenges (NAEC) and Inclusive Growth initiatives, the OECD believes that efforts to address our productivity and inequality challenges would have a better chance of succeeding if we looked at the synergies and trade-offs emerging from the distinct policy sets targeted at each issue. This means designing policies for each of these two core challenges, bearing in mind how they might impact one another, and avoiding the “silo” perspective. It also requires an ex-ante approach that seeks to broaden the assets that our economies can rely on (high-quality skills, infrastructure or access to finance by SMEs), stopping individuals, firms and regions from accumulating disadvantages that prevent them from fulfilling their full potential.

Ex-post policies, including effective re-distribution, are also a key part of this equation to correct for those outcomes that do not deliver for people, firms and regions. Such interventions are particularly vital to stop the income inequality of one generation transmuting into the inequality of opportunities for the next.

We must also learn from previous policies. Traditional measures to boost productivity in competition, labour market, or regulatory frameworks should allow for the reallocation of resources to more productive activities, or for increasing productivity in specific sectors. But these may have an adverse impact on inequalities of income and opportunities, if workers are not equipped to cope with change due to their low skills, or initial conditions. In the past, the drive towards flexible labour markets has benefited many employers, and particularly the most productive firms that have gained from an improved allocation of labour resources. But increased flexibility has also brought a greater prevalence of non-standard work. Recent OECD work on job quality highlights how low-skilled individuals can be trapped in precarious low-wage jobs, and receive less training.

Our approach to designing policies to ensure that those individuals, firms and regions that are left behind can fulfil their full potential and contribute to a more dynamic economy draws on OECD work from diverse policy areas. It starts with the Inclusive Growth agenda, by focusing on well-being as an ultimate objective of policy. It builds on OECD productivity work, via The Future of Productivity report and efforts towards an OECD productivity network. It also synchronises with the OECD’s efforts to measure productivity more accurately at a time when traditional measures are ill-adapted to account for the full effects of rapid technological change and innovation centred on knowledge-based capital, the increasing prominence of the services sector, and productivity in the public sector.

The ultimate goal is for governments to focus on an extensive range of win-win policies that can reduce inequalities while supporting productivity growth, thereby creating a virtuous circle for inclusive and sustainable growth. This calls for distinct but complementary policy interventions at the individual, firm, regional and country levels. What this entails in practice will vary for each country depending on its circumstances. But broadly speaking, a number of policy areas are worth considering:

First, a new approach is needed to boost productivity at the individual level so that everyone has the opportunity to realise their full productive potential. Expanding the supply of skills in the population through more equal access to basic quality education–particularly of low income groups–is crucial, but not sufficient. With rapid technological change, skills need to keep up with the demands of the market to avoid the skills mismatches which have contributed to the productivity slowdown. A broad strategy is also needed to ensure a better functioning of the labour market, promote job quality, reduce informality, allow for the mobility of workers and inclusion of underrepresented groups such as women and youth, and to promote better health outcomes for everyone.

Second, for people to realise their full productive potential, businesses have to realise theirs. While heterogeneity among firms is normal, the widening dispersion in productivity levels and its implications for aggregate productivity and workers is a cause for concern. According to our productivity report, the early 2000s saw labour productivity at the global technological frontier increase at an average annual rate of 3.5% in the manufacturing sector, compared to just 0.5% for non-frontier firms. The gap was even more pronounced in the services sector. The larger the share of businesses that can thrive, the more productive and inclusive our economies will be. Achieving this requires a reassessment of competition, regulatory and financial policies to ensure a level playing field for new firms relative to incumbents. It also requires policies to facilitate the diffusion of frontier innovations from leading to lagging firms.

Third, policy prescriptions will be ineffective unless they take regional and local circumstances into account. Inequalities that play out in regions, like housing segregation by income or social background, poor public transport, and poor infrastructure, can lock individuals and firms in low-productivity traps.

Finally, adopting a more holistic approach to policy requires fundamental changes to public governance and institutional structures, to strengthen the ability of national governments to design policy that promotes synergies and deals with trade-offs. In highly unequal societies, governments also need to address political economy issues, including the capture of the regulatory and political processes by elites that benefit from the status quo, and policies that favour incumbents.

None of this will be easy, but it is nevertheless essential. At the OECD we believe it is time to develop a better understanding of the dynamics between two of the key issues of our time– productivity and inequality–in order to build a more resilient, inclusive and sustainable future.

Adapted from a blog published on on 29 January 2016, see


Ramos, Gabriela (2014), “Inclusive growth: Making it happen” in OECD Yearbook 2014, visit

OECD (2015), The Future of Productivity, OECD Publishing

For more on OECD work on inclusive growth, visit

For more on the OECD productivity network, visit

Productivity and inclusive growth at the OECD Forum 2016

Access to quality jobs at the OECD Forum 2016

Other OECD Forum 2016 issues

Productivity statistics

OECD work on productivity and long term growth

OECD work on economy

OECD work on social and welfare issues

OECD work on income inequality and poverty

OECD work on industry and entrepreneurship

OECD Yearbook 2016

© OECD Yearbook 2016

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

OECD Observer Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Subscribe now

<b>Subscribe now!</b>

To order your own paper editions,email

Online edition
Previous editions

Don't miss

  • MCM logo
  • The following communiqué and Chair’s statement were issued at the close of the OECD Council Meeting at Ministerial level, this year presided by the Slovak Republic.
  • Food production will suffer some of the most immediate and brutal effects of climate change, with some regions of the world suffering far more than others. Only through unhindered global trade can we ensure that high-quality, nutritious food reaches those who need it most, Angel Gurría, Secretary-General of the OECD, and José Graziano da Silva, Director-General of the United Nations Food and Agriculture Organization, write in their latest Project Syndicate article. Read the article here.
  • Globalisation will continue and get stronger, and how to harness it is the great challenge, says OECD Secretary-General Gurría on Bloomberg TV. Watch the interview here.
  • OECD Secretary-General Angel Gurría with UN Secretary-General António Guterres at the 73rd Session of the UN General Assembly, in New York City.
  • The new OECD Observer Crossword, with Myles Mellor. Try it online!
  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2019