Enhancing productivity is not just an end-goal for policymakers: there is a significant connection between productivity gains and the growth of wages and employment, both at the micro- and macro-economic level. Indeed, firms that operate more efficiently tend to offer better wages and employ more workers, and productivity growth can further generate spillovers at aggregate levels.

To foster productivity growth, policies must ensure a dynamic business environment that supports entrepreneurship, experimentation and firm growth, and that enables a productivity-enhancing reallocation of resources. Emerging firms, especially transformative startups, play a pivotal role in driving productivity, innovation, but also job creation. However, they are generally more sensitive to economic and framework conditions. 

Most OECD countries have experienced a slowdown in productivity growth, accompanied by a widening gap between high-productivity “frontier” firms and low-productivity “laggard” ones. This divergence seems tightly linked to the digital transformation and the growing role of intangible assets, highlighting uneven success among firms in adapting to these structural transformations and harnessing them.

To address this, policies should aim at boosting productivity broadly. Alongside enabling innovation and their market applications to push the technological frontier, policy makers should also focus on the diffusion of innovation throughout the economy, as well as on resource reallocation, to reduce gaps between firms and ensure that productivity gains are widely shared.

OECD countries have also experienced a decline in business dynamism over the last two decades, with reduced rates of firm entry, job reallocation, and young firms’ contribution to employment growth. Indicators of firm market power and market concentration also suggest shifts in the competitive environment. The COVID-19 pandemic, energy crisis, and heighted geopolitical tensions have further underscored the urge to address long-standing challenges to business dynamism to unlock sustained productivity growth.

Policymakers should ensure a level playing field with market contestability and reduce barriers to firm entry and growth. These are key steps to foster entry and the scale-up of young firms, foster competition at the top, and facilitate efficient firm selection at the bottom.

To unlock productivity growth’s socio-economic benefits, policies must act around complementary goals: boosting productivity; enabling it to translate into employment and wage growth; and promoting inclusiveness and sustainability.

This calls for a comprehensive and cohesive policy mix. Key elements include: appropriate framework conditions that enable firm dynamics and resource reallocation; competition policies that ensure a level playing field and market contestability; funding availability at all stages of firms’ life cycle; investing in firms’ absorptive capacity and in human capital that keeps pace with technology and boosts the skills of workers, managers and entrepreneurs while ensuring inclusiveness; investment in infrastructure (particularly digital); support to the green transition through innovation and adoption of green technologies.