Five ways to boost productivity

A new study by the IW Cologne, commissioned by the Foundation for Family Businesses, shows that Germany has considerable untapped productivity potential, which can be realised primarily through digitalisation, artificial intelligence, innovation, the reduction of red tape and investment.

There is an urgent need for action, as Germany is experiencing a persistent slump in productivity: whilst labour productivity was still growing by around 2 percent annually in the 1980s and 1990s, it now stands at just 0.3 percent – even though, in view of demographic change, at least 1.6 percent would be required to safeguard prosperity.

How is productivity defined?

Labour productivity refers to the average economic output generated by each person in employment. It is largely determined by factors such as labour input, knowledge and skills, the stock of capital (e.g. buildings, machinery and infrastructure), the use of resources, and technological and organisational progress.

High productivity is the key foundation for economic prosperity, rising incomes and long-term economic growth.

How has productivity developed in Germany?

Productivity growth in Germany has slowed significantly in recent decades. Whilst productivity was still growing by around 2 percent per year in the 1980s and 1990s, growth rates from 2000 onwards were only about half that level, averaging just 0.3 percent over the past six years.

The causes include, amongst other things, a decline in innovation and investment, a shortage of skilled workers, demographic change and structural change towards more labour-intensive services.

Where does the greatest potential for increasing productivity lie?

This study shows that the greatest potential for boosting productivity lies in five areas of action: digitalisation, artificial intelligence (AI), innovation, reducing red tape and investment.

In the short term, reducing red tape offers the greatest leverage – a comprehensive reform could boost productivity by 1.6 percent within just one year. In the long term, innovation and AI are the strongest drivers of growth. Higher investment in research and development could boost productivity by up to 13 percent, whilst the consistent use of AI could increase it by up to 9.3 percent.

The study emphasises, however, that the effects of the individual measures cannot simply be added together and that, in particular, innovation and digitalisation only unfold their full impact over a period of several years.

What recommendations for action can be drawn from this?

The study shows that Germany can tap into significant productivity potential if policy reforms and business investment work together consistently.

In the short term, the focus should be on reducing bureaucracy – for example, by cutting reporting and documentation requirements and speeding up approval procedures. In the long term, the study recommends accelerating the uptake of digital technologies and artificial intelligence, boosting private investment in research and development, and modernising public infrastructure.

Examples of policy measures in other countries demonstrate how these levers can be applied in practice.