Labor Productivity Growth in the Nordics: The Roles of Frontier Firms and Diffusion

This paper investigates the drivers of labor productivity growth in the Nordic countries, using both sectoral and firm-level data over the period 2000–2024. The sectoral analysis documents a broad-based slowdown in labor productivity growth, driven primarily by within-industry developments rather than shifts in the sectoral composition of employment. Firm-level evidence shows that productivity growth is increasingly concentrated among frontier firms—the most productive firms within each industry—while the rest of the firm distribution (“laggards”) has experienced weak or stagnant productivity growth. A decomposition of frontier productivity growth reveals that gains among incumbent frontier firms account for most productivity growth at the frontier across countries. The contribution of net firm entry is highly heterogeneous, and is positive mainly in countries where young entering firms exhibit strong productivity momentum upon joining the frontier. The paper finds evidence of productivity diffusion from frontier to laggard firms but shows that the speed of diffusion has declined since the 2010s. The slower diffusion is closely associated with rising persistence at the productivity frontier: when the same firms remain at the frontier for longer periods, opportunities for laggards to catch up are reduced. Overall, the findings highlight that sustaining aggregate productivity growth hinges not only on innovation at the frontier but also on firm dynamism—particularly entry, exit, and turnover at the frontier—to ensure that productivity gains diffuse broadly across the economy.