Article by Amando Garcia Schmidt

Current economic growth in Germany lacks inclusiveness. One reason is stagnating productivity growth: the economy’s ability to make more from its inputs has declined. The key driver of past economic growth, productivity today just grows for a few “super star firms” instead of growing consistently across all firms and households in Germany. Consequently, wage differentials between households and regions have severely increased in Germany and thus driving income inequality. In the future, productivity growth needs to grow strongly in Germany anyways: the baby boomers will drop out of the labor market and hence a substantially depleted labor force needs to generate even more growth. Migration and better support of working families alone will not resolve this challenge. At the same time, globalization and digitization increase competitive pressure on the economy. Germany thus needs to make more of its resources. That is, economic policy needs a stronger focus on productivity – without neglecting inclusiveness of economic policy, a premier principle of its famous Social Market Economy.

Agenda for Inclusive Productivity

In short, Germany needs an agenda for inclusive productivity – i.e., economic policy striving to achieve broad gains in productivity. This project sets the agenda for more productivity growth in Germany and develops evidence-based policy recommendations conducive to inclusive productivity. In doing so, the project centers around three policy areas:

– Competition policy: Increased market concentration hampers productivity growth – many firms, sectors and regions are increasingly unable to keep up with the global digitized economy. Policy makers can develop a modern, pro-competition framework suited to incentivize broad gains in productivity for all firms and regions.

– Investment policy: Outworn assets and an insufficient digital infrastructure are a threat to productivity and inclusive growth. In particular, the industrial backbone – the so called German Mittelstand – falls short of investing adequately into knowledge-based capital, a central driver of productivity. Economic policy needs more effective strategies and instruments for public and private investment that fosters inclusive productivity.

– Innovation policy: Innovations are central to productivity. The joint work of firms, research and entrepreneurs towards innovation is concentrated on few regional hubs while many regions cut off from the innovation process. Strong efforts in economic policymaking are essential to re-kindle Germany’s strengths in innovations – and to better capitalize on its workforce, firms and regions in creating a powerful and inclusive system for innovations in Germany.