BCG Henderson Institute

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This research was published on August 3rd, 2021 in World Economic Forum

The idea that technology drives productivity growth is both a commonplace and a common frustration. Economies operating at or near the technological frontier have long seen sagging trend growth rates despite marvelous technology — from artificial intelligence to bioengineering to robotics — proliferating at breakneck speed.

This matters because productivity, or output per input, pays for higher wages and is the foundation of long-run prosperity. In that sense, it matters most in rich economies where higher productivity growth would allow political debates to shift from (re-)distributing a relatively stagnant economic pie to sharing a growing one.

Yet, there is an often-overlooked factor in the debate about technology and growth. Yes, technology undoubtedly plays a critical role, but we should think of it as the fuel of productivity growth. The spark is provided by tight labour markets, i.e. when firms are forced to better utilize technology because they cannot add labour easily.

So how can cyclical tightness spur productivity growth? Which types of economies are set to benefit from this relationship? And why should policymakers see tight labour markets as both an opportunity and risk?