09 Dec 2010

Living Standards in an Ageing, Greener, Knowledge Economy: Towards a period of lean cows?

Jørgen Mortensen

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This paper provides evidence on past growth of productivity, analysing the evolution of labour productivity, capital deepening and multi-factor productivity. Based on a literature review of recent studies, it shows that economic growth is increasingly attributable to the accumulation of intangible capital and that consequently, an increasing share of conventionally measured rise in labour productivity has, in fact, been ploughed back into the economy as intangible capital formation. In addition, it shows that on average for the developed countries examined, the growth of total factor productivity has been the main determinant of the increase in living standards over the 50 years from 1960 to 2010. It also demonstrates a striking slowdown in the growth of both productivity and living standards during this period. Looking ahead, it argues that the period 2010 to 2030 is likely to see a considerable expansion of tangible and intangible capital formation and lower growth of multi-factor productivity. The paper therefore concludes that over the next 20 years the scope for growth in living standards in the developed economies will be very limited, on average around half a percent per annum, with serious consequences for social conditions and a likely aggravation of inequalities.

Jørgen Mortensen is Associate Senior Research Fellow at CEPS.