Executive summary
The national and regional diagnosis show a generalized deceleration in labor productivity growth
National diagnosis
The slowdown in economic growth following the war in Ukraine has negatively influenced the growth of hourly labor productivity in Belgium. Over the period 2019-2022, the average annual productivity growth rate reached less than half a percent. This development is explained by a very dynamic increase in hours worked while the growth in value added in volume remains limited. It also corresponds to a generalized slowdown in labor productivity growth within industries of the manufacturing while productivity gains in market services increase compared to the 2012-2019 period. For the latter, the good performance recorded over the period 2019-2022 is mainly due to the year 2020 and only concerns half of the 12 industries constituting market services.
Regional diagnosis
By comparing two recent periods without a major crisis, we observe that, in the three Belgian regions, the growth rates of hourly productivity slowed down drastically on average between the periods 2003-2007 and 2012-2019. This reduction in hourly productivity gains is more marked in the Brussels Region and in Flanders where the volume of hours worked showed greater resilience than in Wallonia in the face of the generalized slowdown in economic growth between these two periods. At the sectoral level, the manufacturing continues to record higher productivity growth than the rest of the economy. Productivity gains in manufacturing, however, declined sharply in the Brussels Region and Flanders between the periods 2003-2007 and 2012-2019, while they remained stable in Wallonia. They also dropped in the important market services sector in Brussels and Flanders, unlike in Wallonia.
For 2020, data from regional accounts confirmed that the loss of activity linked to the health crisis mainly resulted in a sharp drop in working hours for the three regions and much less in an adjustment in employment. Hourly productivity therefore increased significantly in each region in 2020, while apparent labor productivity decreased due to the limited decline in the number of workers.
Calculations based on the interregional input-output table for the year 2015 also shows the interconnection between the three regions. Indeed, each of the regions contributes in a significant extent to the gross added value and employment of exports from another region, with the Brussels Region contributing significantly to the exports of other regions.
A policy focused on productivity growth is more necessary than ever
Productivity growth is crucial
As the main determinant of economic growth – if not the only source of potential long-term output growth – productivity growth makes many of the challenges we face today financially easier to address. Think about the sharp increase in social spending linked to the ageing population, but also the major investments needed to face the climate change and its transition, as well as other societal challenges that arise, for example in terms of mobility, of social cohesion, new developments in healthcare... These challenges require additional resources/investments, both private and public, which, in the absence of economic growth, should be financed by a reduction in consumption and/ or would jeopardize the viability of public finances. Furthermore, productivity growth is also an important condition for real income growth.
Productivity growth has been declining for some time while challenges lie ahead
Productivity growth has systematically declined over the past five decades. In the 1970s, when Belgium achieved productivity gains by integrating American technologies, productivity growth reached 4.5 % per year on average. Since the 2000s, it has only been 0.8 % per year on average. Now that the catch-up phase is over, the technological frontier needs to be moved, which poses a much greater challenge. Furthermore, productivity growth can be expected to be significantly dampened by climate change, particularly because investments in productive capital and innovation are sacrificed in favor of investments in climate transition and adaptation to climate change.
A policy attentive to productivity growth is necessary
Given the challenges and importance of productivity growth, policies to boost productivity are perhaps more important now than ever. In its report, the NPB identifies three areas which, according to it, should be prioritized to stimulate productivity growth.
Ensuring a sufficient supply of qualified labor
Human capital is a key factor for boosting productivity. However, the shortage of labor and the new skills required by the digital and ecological transitions mean that employers are facing increasingly difficulties to recruit workers with the right skills.
This challenge requires action in several areas. For example, it is important to address labor shortages and skills mismatches, including by strengthening the activation of disadvantaged groups in the labor market. Training is essential in general. First of all, it is necessary to put in place quality basic training paying sufficient attention to STEM and the skills necessary for the digital and ecological transitions. But it is also important to strengthen continued training. In this context, the NPB refers to its previous recommendation to ensure a broad-based strategy that responds to the main challenges to be addressed. We must therefore ensure not only a supply of quality training to support industrial policy, but also the demand for training (targeting in particular specific groups such as those over 55 and low-skilled people).
Guarantee sufficient public investment
Growth in productivity and TFP in particular also requires sufficient investment in quality infrastructure. In Belgium, public investments have remained low for many years. As a result, there has even been a downward trend in the net capital stock of public administrations expressed as a % of GDP since the 1990s, which harms the quality of public infrastructure and also weighs on private investment. This while the ecological and digital transitions require an actual increase in investments, including public ones.
Of course, the sustainability of public finances must also be the subject of particular attention and a mediumterm budgetary consolidation strategy must be pursued. But the latter must be combined with investments and reforms favoring higher sustainable growth. In this context, it is important to maintain domestic public investment and effectively use grants from the Recovery and Resilience Facility and other EU funds. In addition to public investing, public administrations also have a major role to play in facilitating and regulating to encourage private investment, moreover by further streamlining permitting procedures, ensuring clear and coherent regulations and ensuring legal certainty.
Stimulate innovation
A third important determinant of TFP growth is innovation. Belgium is considered a leader in innovation at the European level, but it is important to understand why the strong increase in R&D spending in recent years has only resulted in weak TFP growth at the macroeconomic level. Indeed, at the company level, R&D spending is highly concentrated in a limited number of companies which generally have a high level of productivity. Furthermore, as in many other developed countries, the overall slowdown in productivity growth does not apply to these most productive firms, suggesting problems with technology diffusion.
Both innovation and its diffusion require an effective innovation system in which the different dimensions - which interact with each other - all matter. With regard to the Belgian innovation system, it is particularly appropriate to examine how R&D support measures can be further optimized, how entrepreneurial dynamism (including scale-ups) can be facilitated and whether innovation policy in Belgium is sufficiently oriented towards a low-carbon economy.
