Over the past year, I’ve shared my views on the evolving global economic and capital markets, coining the theme “Passageways” to reflect the shifting dynamics we are likely to see in the future. As globalization continues to shrink, we may face a future that differs significantly from the last several decades, especially in terms of inflation and economic well-being.

One major change I foresee is the diminishing impact of globalization, which has previously driven low inflation rates for nearly 40 years. This shift in global economic forces presents new challenges, particularly for worker productivity, which I believe plays a pivotal role in societal wealth and economic growth.

The Importance of Worker Productivity

Worker productivity is a key factor in determining a society’s overall wealth and life quality. A productive workforce creates more than it consumes, and the surplus production translates into investments that help build what economists call “societal wealth.” Over time, countries with higher productivity growth tend to enjoy higher standards of living and longer life expectancies.

In this discussion, we will explore how worker productivity growth is essential for sustainable economic progress. While the size of a country’s workforce plays a role in GDP growth, productivity—the efficiency with which that workforce produces goods and services—is arguably the more crucial factor.

Key Factors Influencing Worker Productivity Growth

Worker productivity is driven by several important factors, including innovation, education, and capital deployment. Let’s dive into each of these in more detail.

Education
A highly educated workforce fosters innovation, and societies that prioritize education tend to see higher rates of productivity. Highly educated workers, including scientists, engineers, and medical professionals, drive real societal innovation. Countries with better education systems are typically able to generate more high-quality, productive workers.

When examining educational outcomes, South Korea stands out as having the best primary and secondary education systems among G20 countries, followed by Germany, the UK, Japan, and France. The U.S. ranks highly as well, coming in at sixth place. Education at all levels contributes significantly to a nation’s ability to innovate, making it a core driver of worker productivity.

Innovation
Innovation is the bridge between education and productivity. Highly educated individuals can create new ideas, but it is innovation—often in the form of patents—that brings these ideas to life. Countries that encourage innovation through research, development, and patent filing tend to see higher productivity growth rates.

Looking at global patent data, China has emerged as a dominant force in recent years, with an average annual growth rate in patent filings of 15.4%. Meanwhile, the U.S. has consistently outperformed other regions, with patent applications increasing by 4.1% annually from 1985 to 2021. The strong innovation environment in these countries has contributed to their robust GDP growth and labor productivity gains.

Capital Deployment
While education and innovation are essential, the actual application of new ideas requires capital. Businesses need the financial resources to bring innovations to market, and this is where capital spending comes in. When nations invest in infrastructure, technology, and other key areas, they enable their workforce to become more productive.

Countries with higher rates of capital investment tend to see stronger productivity growth. For instance, the East Asia/Pacific region, which has consistently invested more than the global average in capital spending (34.5% of GDP from 2015 to 2021), experienced labor productivity growth rates of 4.2% annually, far surpassing the world average of 2.0%. This region has been at the forefront of global economic growth.

The Impact of Worker Productivity on Inflation

When worker productivity increases, businesses can produce more goods and services at a lower cost, which helps reduce inflationary pressures. From a macroeconomic standpoint, rising labor productivity can alleviate the need for businesses to raise prices, helping to control inflation.

A Sustainable Path to Growth

The key drivers of higher worker productivity—education, innovation, and capital spending—create the foundation for sustainable economic growth. These factors, combined with population growth and a society’s commitment to improving productivity, lead to higher levels of societal wealth. This wealth contributes to better living standards, longer life expectancies, and an overall higher quality of life.

As the global economy faces new challenges, such as the decline of globalization, it becomes even more critical to focus on increasing worker productivity. Societies that invest in education, foster innovation, and ensure robust capital spending will be better positioned to thrive in the coming years.

Conclusion

The future of economic growth lies in the hands of a productive workforce. By nurturing innovation, investing in education, and deploying capital effectively, nations can achieve long-term, sustainable growth. Worker productivity remains the cornerstone of a thriving economy, leading to greater societal wealth and improved living standards for all.