Wasteful abusive and focused on labor productivity.

Labor productivity is also quite low For most economies in the region, service sector productivity is less than 20 of the OECD average. Even in South Korea, labor productivity in industry is 118 of the OECD figure, but only 43 of the average for services.

Second, high productivity sectors expand and hire more labor. Both processes are needed if the reforms are to increase economy wide productivity.

In particular, they show that services have exhibited unconditional convergence in productivity recently. That is, countries furthest away from the global frontier of labor productivity have seen the fastest productivity growth in services.

We've had productivity go from 30 dollars to 150 dollars per hour of labor in the last 50 years.

Persistently weak labor productivity growth has created a situation in which unit labor costs do not fall, even if real wages remain stagnant or decline. Indeed, despite a 1.3 drop in real wages in 2011, unit labor costs remained unchanged.

NEW YORK Recent trends in productivity growth make it hard to be optimistic about the future. In 2014, the global growth of total factor productivity, or TFP, which measures the combined productivity of capital and labor, was essentially zero for the third consecutive year.

In the new industrial revolution extractive must be replaced by renewable linear by cyclical fossil fuel energy by renewable energy, sunlight wasteful by waste free and abusive by benign and labor productivity by resource productivity.

So a country where labor productivity is low will become an attractive location for foreign direct investment, and the resulting increase in the capital labor ratio will raise productivity. Wherever one looks, using Marshall s toolkit, one sees economic equilibrium pulling things back to normal, compensating for and attenuating the effects of shocks and disturbances.

In view of these systemic weaknesses, China s ability to overcome its labor deficit by shifting to an innovation and productivity driven economy remains dubious.

Declining competitiveness is best captured in a single indicator unit labor costs, which measure the average cost of labor per unit of output. In a monetary union, discrepancies in wage growth relative to productivity gains that is, unit labor costs will result in a chronic accumulation of trade surpluses or deficits.

The problem is that rapid labor productivity growth in the industrial sector more than 10 per year over the last two decades is reducing the need to hire more workers. The service sector, by contrast, experienced much slower labor productivity growth (about 5 annually over the same period), meaning that it could be far more effective in generating employment growth.

For catch up countries, like China, rapid growth is often accompanied by brisk structural change that moves factors of production, especially labor, from low productivity activities to economic sectors with much higher productivity. This adds to the surplus by increasing firms profitability.

From 1992 to 2011, labor productivity grew at an average annual rate of 0.9 , the lowest in the OECD. Since 2001, unit labor costs have been growing faster than real GDP and employment, undermining the economy s competitiveness vis à vis developing countries.

Indeed, excessive wage deflation is likely to have negative effects on productivity. Skilled labor is likely to emigrate faster, and extreme austerity, falling prices, and high unemployment and the resulting likelihood of social tension are not exactly conducive to investment, innovation, or labor mobility.

The dispersion of total factor productivity the joint productivity of capital and labor inside emerging countries has been found to be large. Moreover, sectors such as agriculture, energy, transport, and trade also have catch up growth potential, through imports of technology, institutional know how, and organizational models.

A better mix of fiscal and monetary policies and sustained measures to enhance productivity and competitiveness remain necessary conditions for addressing America s labor market challenges. But they are not sufficient.

But China s investment rate is already too high, accounting for almost half of GDP. With capital intensity increasing significantly faster than labor productivity in China, the inefficiency of investment is clear.

True, there are reasons to reassess a country s potential growth in line with new information on labor market conditions, investment, and productivity. But relentless attempts at accuracy easily result in noise.

These countries had already lost export market shares to China and other low value added and labor intensive Asian economies. Then a decade of nominal wage growth that out paced productivity gains led to a rise in unit labor costs, real exchange rate appreciation, and large current account deficits.

Since 1964, two key forces have fueled exceptionally fast GDP growth the expansion of the labor supply, driven by rapid increases in population, and steady productivity gains. According to a report by the McKinsey Global Institute (MGI), the average annual GDP growth rate of 3.5 in the 19 member countries of the G 20 (not including the European Union) and Nigeria owes about 1.8 percentage points to labor and 1.7 points to productivity.

And Italy s parliament rejected many of Monti s proposed reductions in government spending. Labor and many product markets remain closed, despite the urgent need to increase competition, lower production costs, and raise productivity.

For the Puerto Rican authorities, this means making the island friendlier to business, including by removing onerous labor market regulations. Meanwhile, the US government could exempt Puerto Rico from the Jones Act, extend to it Chapter 9 bankruptcy coverage, and align the island s welfare and labor requirements with its productivity level.

As a result, labor is now some 20 cheaper in Mexico in relative terms. Taking productivity trends into account, unit labor costs have also risen less than in China and other major competitors, allowing Mexico to recover since the mid 2000s some of the market share it had previously lost.

These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor intensive and low value added exports. After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply.

Productivity growth is not about working longer it is about generating more output per unit of labor input. Any undercounting of output pales in comparison with the IT assisted undercounting of working hours.

A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.

Productivity can be enhanced by capital investment, technological innovation, and improvements in the knowledge and skills of the labor force, though economists disagree on which has the largest impact. According to my research with Larry Lau, technology has played the largest role boosting productivity in the G 7 economies since World War II.

The real challenge will be in designing the third arrow, what Abe refers to as growth. This includes policies aimed at restructuring the economy, improving productivity, and increasing labor force participation, especially by women.

Across the continent, but especially in southern Europe, taxes and strict labor market regulations keep unemployment high, at 11 of the labor force, and dissuade Europeans from investing in their education. The natural consequences are too little employment, too little investment in sophisticated education, too little innovation, and minimal increases in productivity.

Currency undervaluation is such a potent instrument for growth for the simple reason that it creates incentives for the economy s growth promoting sectors. It increases the profitability of manufacturing and non traditional agricultural sectors, which are the activities with both the highest level of labor productivity and with the most rapid rates of productivity increase.

Optimal trade intensity depends on many factors such as relative labor costs, transport costs, productivity levels, and economy of scale effects. Trends in these factors might make reduced trade intensity not only inevitable but desirable.

The path to recovery, though difficult and lengthy, has been relatively clear and specific. First, unit labor costs needed to decline toward productivity levels to restore competitiveness a painful process without the exchange rate mechanism.

Governments, too, are shedding labor particularly governments burdened by high deficits and debts. And, by transforming how services are provided to the public, the e government trend can offset the employment losses with productivity gains.

Second, emerging market bears point out that these economies have gained major productivity benefits from the migration of surplus rural labor to urban areas, a surplus that will soon be exhausted. This, too, is true.

In India, for example, increasing productivity and long term growth require fiscal discipline and a raft of financial and labor market reforms. But the central bank is being asked to do all the heavy lifting.

The issue is not the productivity of European workers when they are on the job, but rather the need to increase labor force participation through policies that raise employment rates and reverse the decline in weekly work hours. More flexible labor markets and reform of entitlement programs would further allow Europe to confront the demands of greater competition without recourse to insular protections, such as those placed on labor migration.

The newly industrialized city of Manchester, which horrified Friedrich Engels when he worked there in the 1840s, had the highest level of labor productivity the world had ever seen. But the factory workers wages were set not by their extraordinary productivity, but by what they would earn if they returned to the potato fields of pre famine Ireland.

To be sure, China s growth strategy powered by investment in infrastructure, a massive increase in low cost manufacturing exports, and technology transfers has led to some structural change. As labor and capital moved from low productivity sectors and regions to high productivity activities, resource allocation became more efficient, real wages rose, and the economic structure was upgraded.

Productivity performance did not vary dramatically between northern and southern European countries from 2000 to 2010 in fact, average annual productivity growth was faster in Greece than in Germany (1 versus 0.7 ). But labor costs increased much faster in the south, resulting in differential cost increases that cannot be addressed by devaluation as long as the monetary union endures.

Chinese officials hope that higher household incomes will boost consumer spending, as the tightening labor market causes wages to rise and as urbanization shifts workers from low productivity farm work to higher wage employment in the cities.

Healthy children attend school more regularly, are better able to learn, and become more productive adults. New research shows that vaccines improve cognitive development in children, raise labor productivity, and contribute to a country s overall economic growth.

Those differences are so huge that some people consider efforts to compete futile. But, as productivity is much higher in Germany, an effective reduction of hourly labor costs by uncompensated increases in working hours seems worth trying.

Productivity measurement

The alternative is muted wage and income growth shared across the income spectrum, combined with productivity enhancing measures. This was a component of Germany s successful reform program of a decade ago, which included labor market and social security reforms, the combined effect of which was to restore competitiveness and growth potential in the tradable sector, while improving productivity on the non tradable side.