Increasing Productivity through Education and Innovation

Despite rapid technological progress, productivity growth has slowed across advanced economies. In Sweden, as in other advanced economies, productivity growth has been weaker over recent decades than it was historically.

A country’s long-term economic prosperity depends primarily on productivity growth — that is, by how much more can be produced with the same amount of labor and capital.

The report analyzes developments in productivity and competitiveness in Sweden from an international perspective. It discusses key explanations for the slowdown in productivity growth, with particular emphasis on drivers such as research and development, workforce skills, globalization, structural transformation, and competition.

The report shows that Sweden has strong underlying conditions in many respects, but also identifies clear weaknesses. Harry Flam highlights in particular the shortage of educated workers in science, technology, engineering and mathematics (STEM).

Key findings

• Productivity growth in advanced economies has fallen from around 2 percent per year historically to a level well below the historical average.
• Roughly half of the decline can be explained by lower investment, and roughly half by slower growth in total factor productivity (TFP).
• More capital per worker has accounted for around 52 percent of productivity growth in OECD countries since the mid-1990s.
• Sweden has a relatively high level of investment, with more than half consisting of investments in intangible assets (such as software and R&D).

• Sweden ranks third among OECD countries in investment in R&D, at around 3.6 percent of GDP.
• Investment in R&D generally yields positive returns. R&D conducted abroad has a greater effect on productivity than domestic R&D, and the effect of foreign R&D is larger in small countries than in large ones.
• Just over 20 percent of university graduates in Sweden have degrees in STEM subjects, which is below the average for comparable EU countries.
• Structural change has accounted for around 40 percent of productivity growth in the Swedish business sector in recent decades, but appears to have weakened over time.
• Firms that have changed ownership are estimated to have accounted for about 68 percent of productivity growth since the turn of the millennium.
• Trade and international investment are central to Sweden’s productivity growth, and trade barriers are particularly harmful for small countries such as Sweden with small home markets.

Recommendations

• Raise ambitions for STEM education
  The government’s target of 90,000 STEM students per year is too low — 100,000 students would be required just to reach the Western European average.
• Increase young people’s interest in science and technology
  The government should work systematically with school authorities to increase young people’s interest in STEM subjects.
• Invest early in particularly talented students
  Academically talented lower secondary students should be actively identified and encouraged to enroll in science and technology tracks in high school.
• Compensate for more demanding highschool programmes
  The greater workload required in science and technology programmes should be taken into account in admissions to higher education.
• Increase teacher-led instruction
  Reducing dropout rates in STEM programmes requires more classroom instruction.

About the study

The report draws on economic research and international databases (including OECD and Eurostat data) and combines macroeconomic data with firm- and sector-level studies. It summarizes several of the reports and topics covered in the SNS research project Productivity, Competitiveness and Sustainable Growth.

About the author

Harry Flam is Professor Emeritus of International Economics at the Institute for International Economic Studies at Stockholm University.