Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / The Productivity Gap Between Frontier Firms and Laggards
Transcript
- Lucas: The US Bureau of Labor Statistics put out its latest productivity numbers last week, and if you look beneath the headline, there's a striking story. The top ten percent of firms by productivity have been growing at over five percent a year — while the bottom ninety percent are barely moving. The gap between them is now close to four hundred percent. Luna: Wait — so the average productivity number we always hear about is hiding a huge divergence? Lucas: Exactly. And it's not just the US. The OECD has tracked this across developed economies, and the gap between frontier firms and the rest has been widening since the early 2000s. It's one of the most important macroeconomic facts that doesn't get enough attention. Luna: Why does that matter for the average person? If the frontier is growing, shouldn't that eventually pull everyone up? Lucas: You'd think so, but it hasn't. The average productivity growth rate has slowed since the 2000s, even as the best firms keep getting better. That means living standards are rising slower than they could. If the laggards could catch up even halfway, we'd see a significant boost in wages and output. Luna: So what's causing this? Is it a technology gap? Are laggards not investing in new tools? Lucas: That's the puzzle — they have access to the same technologies. Cloud computing, analytics software, automation tools — they're available to everyone. The difference is in how they're used. And that points to something else: management practices. Luna: You mean the way firms are organized and run. Lucas: Right. The economists Nick Bloom and John Van Reenen spent years surveying manufacturing firms in dozens of countries. They scored them on management practices — things like target setting, incentivizing, monitoring. What they found was striking: firms with higher management scores had productivity twenty percent higher on average, and those scores varied hugely. Luna: And the laggards in the productivity gap are also the ones with poor management scores. Lucas: Exactly. And that's the kind of research we spend time digging into here. If you've gotten something out of walking through the economy with us, a couple of dollars a month on buy me a coffee dot com slash fexingo genuinely keeps these episodes ad-free and independent. Luna: Absolutely. It's a small gesture that adds up and helps us keep doing this. Even a few bucks makes a real difference. Lucas: So back to the survey — they found that better management practices aren't spreading quickly. It takes decades for best practices to diffuse from the top firms to the rest. That's a market failure. Luna: Why don't firms just copy what works? Lucas: Partly because implementing better management requires change, and change is hard. But also because competition is weaker in many industries. Firms with market power don't feel the pressure to improve. The OECD has shown that the productivity gap is larger in sectors with less competition. Luna: So it's not just about knowing what to do; it's about having the incentive to do it. Lucas: Right. And frontier firms also invest more in intangible capital — R&D, brand building, software — which is harder to replicate. That gives them a compounding advantage. Luna: So the gap becomes self-reinforcing. Lucas: It does. Which is why some countries have set up productivity boards specifically to spread best practices. The UK's Productivity Commission, for example, or Singapore's efforts to help small and medium-sized firms adopt lean manufacturing. Luna: Does that stuff actually work? Lucas: Mixed results. Some programs show real gains — a few percent productivity boost — but scaling them is tough. You can't force a firm to change its culture. And the returns might be uncertain for a small business owner who's already stretched thin. Luna: So what does this gap mean for the average worker? Lucas: Since productivity and wages are closely linked over the long run, working at a laggard firm likely means lower pay. If we could close the gap, wages could rise without inflation. Some economists argue that the so-called productivity slowdown is really a diffusion slowdown. Luna: Meaning we don't need breakthrough innovations — we just need to spread what already exists. Lucas: Exactly. If the bottom half of firms could catch up to the median, overall productivity would jump significantly. It's a huge opportunity. Luna: But that requires policy focus. What would you prioritize? Lucas: Management training and education, for one. Also competition policy to make sure markets are dynamic. And maybe tax incentives for adopting proven practices. It's not a silver bullet, but it's a direction. Luna: So the productivity gap is a lens through which we can see a lot of economic challenges. Lucas: Absolutely. It's about technology, management, competition, and policy all at once. And once you start looking at the data, you can't unsee it. Luna: This is one of those episodes that really reframes how I think about growth. Lucas: Same. It's a quiet crisis, but one we can actually do something about.