Intangible Capital and Growth Essays on Labor Productivity, Monetary Economics, and Political Economy, Vol. 1 by Felix Roth

Chapter 1
The Productivity Puzzle: A Critical
Assessment and an Outlook
on the COVID-19 Crisis
Felix Roth
Abstract This contribution critically assesses the productivity puzzle and gives an
outlook on the COVID-19 crisis. It offers two main conclusions. First, it posits that a
large fraction of the productivity puzzle can be solved by incorporating intangible
capital into the asset boundary of the national accounts. Thus, the productivity
puzzle is largely explained as a consequence of fundamental structural changes
that are underway, transforming industrial economies into knowledge economies.
Secondly, the contribution foresees a post-COVID-19 scenario that is likely to lead
to a pronounced increase in labor productivity growth. This depends, however, on
whether the current push for digitization will be backed by actual investments in
digitization and the necessary complementary investments in (business and public)
intangible capital.
Keywords Productivity puzzle · Intangible capital · Labor productivity growth ·
Structural change · COVID-19 crisis · Remeasurement of GDP
JEL Classifications E22 · F45 · O32 · O34 · O47 · O52

1 Introduction
Labor productivity growth is a central contributor to an economy’s competitiveness
(Krugman, 1994) and rising prosperity (Heil, 2018). In most advanced economies, it
is of key importance in maintaining the standard of living in societies experiencing
population aging (Posen & Zettelmeyer, 2019). Despite its importance, it is widely
acknowledged that advanced economies, such as the US and the EU, have suffered a
pronounced decline in labor productivity growth rates since the start of the Great
Recession in 2007 (Oulton, 2018; Van Ark & O’Mahony, 2016; Van Ark, 2016; Van
Ark & Jäger, 2017; Van Ark et al., 2018). In the aftermath of the financial crisis
(2008–15/16), these rates have been more than halved compared to the pre-crisis
period (1995–2004/07) (Remes et al., 2018; Brynjolfsson et al., 2019; Van Ark et al.,
2018).
Although a steady decline in labor productivity growth can be observed in these
economies from the 1970s onward (Gordon, 2018; Bergeaud et al., 2016;
Brynjolfsson et al., 2019)—despite the exceptional experience of the US in the
mid-to-late 1990s—the magnitude of the decline since the start of the Great Reces-

sion (2008–2013/16) has posed a conundrum to many scholars (Oulton, 2018;
Remes et al., 2018; Van Ark & Jäger, 2017)—principally for two reasons.
First, the decline was puzzling given that real interest rates were close to or below
zero (Teulings & Baldwin, 2014; Summers, 2015; Haskel & Westlake, 2018a).
Second, the decline was puzzling as it occurred in the midst of ongoing revolutions
in both information and communications technology (ICT) and in artificial intelli-

gence (AI) (OECD, 2015). Economists have attempted to capture this conundrum
under several multifaceted labels, such as “the Secular Stagnation Puzzle” (Sum-

mers, 2014, 2015; Teulings & Baldwin, 2014), “the Modern Productivity Paradox”
(Brynjolfsson et al., 2019), or simply “the Productivity Puzzle” (Haskel & Westlake,
2018a). This contribution critically discusses this conundrum by exploring the key
role of intangibles in labor productivity growth. It also explores current issues arising
from the COVID-19 crisis.
This contribution is organized as follows: it opens by offering some brief
introductory remarks and a summary of its main findings and their implications.
Second, it sketches an intangible capital-augmented model for labor productivity
growth as developed by Roth and Thum in 2013. Third, the contribution reviews
salient trends in labor productivity growth from 1950 until 2006. Fourth, it elabo-

rates upon the pronounced decline in productivity experienced from 2007 to 2015,
which first prompted the ongoing discussion among economists over this so-called
“productivity puzzle”. Fifth, the contribution critically discusses this perplexing
“puzzle” by elaborating upon the key role of intangibles in labor productivity
growth. Sixth, it explores current issues arising from the COVID-19 crisis. And
finally, the contribution offers two main conclusions.

Intangible Capital and Growth Essays on Labor Productivity, Monetary Economics, and Political Economy, Vol. 1 by Felix Roth