Economic Productivity Still Hostage to Corporate Lack of Capital – The Economic Journal

Economic Productivity Still Hostage to Corporate Lack of Capital - The Economic Journal

The labor productivity levels of the Portuguese economy derive mainly from the low level of available capital per worker. The conclusion is a report on the productivity of the national economy, released this Friday in the framework of the First Conference of the Productivity Council.

According to the report, the growth of labor productivity in Portugal remained relatively slow, in counter-cycle with the euro zone. "This deceleration in recent years can be explained by the fact that the Portuguese economic recovery in the post-2013 period has been accompanied by a significant increase in employment in labor-intensive sectors and a more limited capital accumulation," they said.

"The more recent trend of labor productivity in the Portuguese economy seems to be more associated with the low level of capital intensity (quantity of available capital per worker) than with the lack of efficiency, properly speaking, of the labor factor," they explain.

Economists argue that the reforms implemented in recent years have had a positive effect on productivity. However, they point out that there is potential for growth through better reallocation of resources.

Economists in the Ministry of Finance and the Ministry of Economy explain that "Recent developments in labor productivity are partly associated with increased employment and the stock of capital per worker, "noting that total factor productivity has for the first time since the economic and financial crisis" made a positive contribution to GDP growth in 2016 and 2017. "

Regarding the composition of the investment, they explain that the weight of construction declined significantly and was partly replaced by investment in "more productive assets" such as intellectual property and machinery and equipment.

Financial system "essential" to investment growth

Economists recognize progress in the Portuguese business fabric, but consider that "Portuguese companies still have high levels of financial pressure and reduced levels of autonomy."

"The limited capital accumulation, partly determined by constraints on corporate financing, has affected productivity growth potential in Portugal," they note. "The robustness of the financial system is thus a key factor in the growth of investment and economic activity."

With regard to the impact of the size of national companies, they emphasize that the "low proportion of medium and large companies, compared with our European partners, is a barrier to productivity growth at company level".

Disparity of qualifications continues to mark the national economy

The Productivity Council also identifies the persistence of the disparity in qualifications in the total active population, with a higher proportion of workers with a lower level of education than the euro area. This framework is especially relevant when analyzing the qualifications of Portuguese managers, who point out that they constitute "a limiting factor of productivity growth".

"The qualification of managers largely determines the ability of companies to adapt to technological change and international competition," they stress.

Economists point out, however, that the country has experienced a significant change in the skills of the younger classes, in line with the eurozone countries. Nevertheless, they warn that Portugal is the third country in the euro zone with the greatest gap between the qualifications of workers and the demands of the job.

"In particular, 23.6% of workers would be overqualified in the face of their duties. The Portuguese labor market also presents one of the highest percentages of workers with areas of study outdated in view of the needs of the workplace in which they are inserted. The high segmentation in the labor market, as it constitutes an obstacle to mobility, contributes to these lags, hampering the efficient allocation of resources, "they conclude.

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