A Micro-Meso-Macro View of Labor Productivity Growth in the Slovak Republic1
After the great financial crisis, the pace of labor productivity growth in Slovakia slowed markedly, but in recent years there are signs of a recovery. We link this potential recovery to macroeconomic, industry-level, and firm-level factors, including reduced labor hoarding compared to the EU, a healthy birthrate of rapidly growing young firms, and a resurgence of productivity growth in both established frontier firms and laggards in manufacturing as well as services. To boost productivity growth over the medium-term, policies should encourage investment in physical, human, and intangible capital to drive renewed TFP growth and continued capital deepening, which will also help Slovakia transition to higher value-added segments of value chains. At the industry level, policies should promote sectoral diversification and economic resilience, for example by expanding vocational education and training with a focus on competencies that are in high demand such as digital skills, and by streamlining procedures for skilled migrant workers in professions with shortages. Finally, micro evidence points to the need for stronger support for innovation. Potential avenues include a further deepening of capital markets, e.g., by nurturing the domestic venture capital ecosystem, stimulating the uptake of existing R&D tax incentives, and more technical assistance to promising firms in emerging sectors.
A. A Macro Perspective
Income per Capita and Convergence to Western Europe, 1990-2023
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
1. Slovakia is part of a select group of countries that leapfrogged their development by growing faster than Western pioneers. Historical data shows that early industrializers like the US and UK, who had to advance the technology frontier themselves, grew more slowly than later developers in Western Europe. Even faster growth was achieved by East Asian and Eastern European latecomers, including Slovakia, Singapore, Poland, and China, who could rapidly adopt frontier technologies. Slovakia maintained this accelerated growth until the 2007-2008 global financial crisis (GFC), after which its growth rates moderated to levels more typical of Western European development (Figure 1, left).
2. Slovakia continues to catch up to Western Europe and improve living standards, though at a markedly slower pace. Between 1993-2008, Slovakia's real GDP per capita (in PPP terms) grew on average by 5.1 percent annually, enabling swift convergence with Western European income levels at a pace of 1.7 percentage points per year. However, slower growth in the post-GFC period has given way to a slower rate of convergence, with the catch-up rate declining to roughly 1 percentage points per year between 2019-2023. At the current pace Slovakia needs at least another generation to close the gap. In 2023, Slovakia’s real GDP per capita stood at 67 percent of the Western European average and at 74 percent of the EU average.2 In terms of income growth Slovakia has been surpassed by several of its peers in recent years, Poland in particular, thus explaining the fact that convergence to the EU average has stalled (Figure 1, right). After the GFC, real GDP per capita (in PPP terms) continued to grow in absolute terms, with annual growth averaging 2.9 (1.3) percent between 2009-2019 (2020-2023).
3. A sharp decline in labor productivity (LP) growth underlies Slovakia's slower income convergence. The relationship between LP growth and LP levels across countries at different development stages shows a clear negative trend, with high performers like China and the United States tracing out the 'LP growth possibility frontier' (Figure 2). As Slovakia aims to reach a higher stage of development, a pressing question then emerges: How does its LP growth decline compare to historical patterns seen in other countries at similar stages of economic development? While Slovakia touched the LP growth frontier during its 2002-2007 'Tatra tiger' period, it has since fallen substantially below it, though recent data shows some recovery signs (Figure 2). While over the medium-term higher LP growth appears feasible given the distance to the frontier, the experiences of Japan (with similar income levels and demographics) and Germany (a key trading partner) suggest a recovery in LP growth is far from inevitable.
Labor Productivity Growth by Country, 1997-2024
(Percent, 5-year rolling avg)
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
Sources: The Conference Board Total Economy Database; and IMF staff calculations.4. Labor productivity growth in Slovakia has picked up in recent years, which can be partially attributed to labor hoarding. Growth of LP per hour worked and per employee slowed from an average of 3.9 and 3.7 percent respectively in the 2000s to 1.8 and 0.9 percent between 2016-19. However, since 2019, average labor productivity per hour worked has increased to 2.3 percent and to 1.4 percent per employee, outpacing the EU average and other CESEE-EU countries (Figure 3, left). According to the National Bank of Slovakia (NBS), the strong productivity growth in Slovakia in recent years in part reflects a combination of relatively fast GDP growth and tight labor markets, implying reduced labor hoarding.3 While labor hoarding in the EU is estimated to have increased, it has been declining in Slovakia due to a less pronounced drop in domestic demand (Figure 3, right). A lack of labor hoarding suggests Slovakia is already utilizing its labor efficiently. In addition to this cyclical macroeconomic factor, the next sections will explore industry-level and firmlevel factors to explain LP growth trends in Slovakia.
Labor Hoarding and Aggregate Labor Productivity Growth in Slovakia
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
B. A Meso Perspective
5. Slovakia’s LP gains were historically mainly driven by Total Factor Productivity (TFP) growth, but over time capital deepening has become more important as TFP growth weakened. Growth in LP comes from three main sources: capital deepening, TFP growth, and labor composition improvements.4 Between 2001 to 2019, TFP and capital contributed on average 2.4 percentage points and 0.6 percentage points respectively to LP growth in Slovakia. TFP's contribution was significantly larger than in the Czech Republic (0.8 percentage points) and Germany (0.3 percentage points), while capital's contribution was smaller than in the Czech Republic (1.5 percentage points) but equal to Germany's (0.6 percentage points) (Figure 4, right). The slowdown in Slovakia’s LP growth after the GFC is linked primarily to a slowdown in TFP growth, from 3.8 percentage points between 2001 and 2010 to 0.8 percentage points between 2011 and 2020, while capital deepening increased from 0.3 percentage points to 1.35 percentage points. This shift from TFP-led to TFP-and-capital-led growth reflects two factors. First, the exhaustion of easy efficiency gains from the transition to a market economy (reflecting low initial TFP levels even compared to Czech Republic) -gains that had come through better resource allocation, exit of inefficient state enterprises, and knowledge spillovers from multinational enterprises associated with relatively small capital investments. Second, EU accession (2004) and euro adoption (2009) not only boosted public investment financed with EU funds, but they also reduced investment risk and enhanced market access, thereby leading to a deeper integration of Slovakia into European manufacturing networks, with new capital investments focused on expanding production capacity within established value chains. Slovakia’s growth process has consequently become more similar to Czech Republic in recent years in that capital accumulation has become a more important driver of LP growth.
Decomposition of Labor Productivity Growth
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
6. In recent decades, Slovakia has moved closer to the LP frontier, but the degree of catch-up varies across sectors. Between 2001 and 2020, LP caught up by 26 percentage points on average across 31 sub-sectors, reaching on average 54 percent of the EU11 frontier. The degree of catch-up, however, has been uneven across sectors, with labor productivity catching up the most in agriculture and certain manufacturing sectors (Figure 5, right half of the circle). Stagnation (and in a few cases regression) has been more common in certain service sectors (G-S). In “Arts, recreation, and entertainment” and “Coke and refined petroleum products”, labor productivity exceeds the EU11 frontier. Slovakia's sectoral labor productivity distribution shows high dispersion, with a coefficient of variation (standard deviation divided by mean) of 1.19 in 2020, after excluding the outlier sector C19 (“Coke and refined petroleum products”). This high ratio indicates substantial variation across sectors and a right-skewed sectoral productivity distribution.
Sectoral Labor Productivity is Catching-up to The EU Frontier Albeit Unevenly
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
Sources: EU KLEMS; and IMF staff calculations.Notes: labor productivity defined as value added per employee at the 2-digit industry level.Frontier is defined as the weighted average productivity of 11 EU countries (AT, BE, CZ, DE, DK, ES, FI, FR, IT, NL, SE), except for sectors C20 and C21 where, due to lack of data, it is defined as the 90th percentile among the EU6 (BE, DE, FR, IT, NL, LUX).Labor Productivity Growth by Sector Aggregates, 2001-2020 and 2015-2019
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
7. From 2015 to 2019, Slovakia's LP growth was driven primarily by services, as labor productivity in both agriculture and industry contracted and labor productivity growth in manufacturing slowed sharply. Between 2001 and 2020, the country's convergence toward the EU frontier was led by TFP growth in manufacturing and services, while industry (i.e., construction, mining, utilities) relied mainly on capital deepening (Figure 6, left). During 2015-2019, capital deepening was stronger in services compared to Germany and the Czech Republic, but weaker in manufacturing (Figure 6, right). This same period saw significant productivity challenges: agriculture and industry experienced declining productivity (-3.7 percent and -0.7 percent annually, respectively), while manufacturing productivity growth slowed amid weak global industrial activity in 2016 and 2019. Only the service sector maintained robust productivity growth.
Productivity Growth Decomposition
(Shift-share analysis, 2019H1-2024H1; percent annualized
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
Sources: Haver Analytics, and IMF staff calculations.8. Recent labor productivity growth in Slovakia has been driven primarily by sectors becoming more productive rather than structural change. Aggregate productivity growth can occur through two channels: sectors becoming more productive, or labor shifting toward more productive sectors. A shift-share analysis following McMillan and Rodrik (2011) reveals that while all sectors showed productivity gains between 2019H1 and 2024H1—particularly manufacturing and services—some labor shifted toward less productive sectors. However, the positive within-sector productivity improvements significantly outweighed these negative reallocation effects (Figure 7). Three potential mechanisms could explain these within-sector gains: existing firms becoming more productive, market entry of productive new firms, or worker reallocation from low to high-productivity firms. Some recent research suggests limited resource transfer between firms of varying productivity (Institute for Economic Analysis-IHA, 2023) casting doubt on the importance of the third mechanism. The next section examines whether the first two mechanisms have contributed to productivity developments, analyzing differences between firm types, and comparing current trends to historical patterns.
C. A Micro Perspective
9. Firm entry and exit rates in the Slovak economy are relatively high, suggesting business dynamism is not constraining productivity growth. Slovakia's firm turnover exceeds the European average, with exit rates approaching US levels - typically considered the benchmark for economic dynamism (Figure 8). While Slovakia recorded negative net firm entry in 2019, bankruptcy data indicates this was an outlier. However, high business turnover alone does not guarantee productivity growth. The key challenge for Slovakia is not firm creation, but rather scaling up promising young firms ('gazelles') that can drive economy-wide productivity gains.
10. Slovakia has been successful in generating and growing 'gazelles'. Gazelles are young firms under 10 years old that achieve three consecutive years of 20 percent+ sales growth and reach at least 100 employees. The birthrate of these high-growth firms in Slovakia is broadly in line with that of most CEE peers in per-capita terms, though Poland and Hungary have shown stronger recent momentum (Figure 9, left). In addition, Slovak gazelles demonstrate strong productivity performance. They match EU averages in sales growth relative to large non-gazelle firms (Figure 9, middle), and recent cohorts show high sales-to-asset ratios compared to their larger, established counterparts (Figure 9, right).
Firm Entry and Exit in The Slovakian Economy, 2019
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
Birthrate of Gazelles in Slovakia and Their Performance Relative to Peers
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
11. An analysis of labor productivity growth in Slovakia between 2008-2023 shows substantial variation across different periods and firm type. Laggard firms, representing the bottom 50 percent of firms by labor productivity, achieved higher productivity growth compared to frontier firms (top 5 percent) across both manufacturing and services sectors, indicating a pattern of convergence. The evolution of productivity growth followed a distinctive U-shaped pattern over four distinct periods, with a significant downturn during 2012-2015 after the global financial crisis, when both frontier and laggard firms experienced depressed productivity growth across all sectors.
12. Firm-level analysis reveals a broad-based recovery in LP growth in Slovakia in recent years, a result that aligns with observations from industry and macroeconomic data. While Slovakia's frontier firms experienced stagnation between 2008-2018 (manufacturing) and 2008-2015 (services), mirroring the broader EU experience, they notably diverged from the EU average by achieving sustained productivity growth across all sectors during 2020-2023, a pattern also observed among laggard firms. This recent performance suggests a broader productivity revival in the Slovak economy, distinct from general EU trends. These firm-level results regarding LP growth align with results observed in industry and national accounts data, particularly the subdued or negative productivity growth observed in certain sectors during 2015-2019, and the signs of a robust recovery in aggregate labor productivity growth during 2020-2023.
Labor Productivity Growth in Manufacturing and Services by Firm Type
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
Note: labor productivity (LP) defined as value added per employee. Laggard firms defined as bottom 50 percent of LP at beginning of each period at Nace2 sub-sector level. Sub-sector growth rates aggregated to sector (manufacturing, services) using EU KLEMS employment shares for Nace2 industries.13. Slovakia's automotive sector shows substantial variation in productivity depending on how it is measured. Starting in the 1990s, a stream of investments by foreign multinationals has turned Slovakia into the EU’s largest car producer in per-capita terms. The country is currently home to three automotive groups with operational assembly plants (Kia, Stellantis, Volkswagen) and should be home to a fourth (Volvo cars) by 2026. Firm-level analysis reveals that productivity in the automotive sector varies depending on whether we look at the whole sector, individual firms, or their position within the corporate structure.
Labor productivity metrics from 2022 Orbis firm data highlight clear differences across the industry: while the Volkswagen Bratislava plant achieved labor productivity of US$89,000, the sector's average labor productivity stood at $68,000, reflecting the influence of smaller, less productive domestic component suppliers.
Slovakia's car assembly plants demonstrate productivity levels comparable to their counterparts in Portugal, Poland, and Spain (Figure 11, top). While these plants are more productive than the average Slovak firm in other sectors, they lag parent companies like Volkswagen Germany and subsidiaries such as Ford Spain (Figure 11, bottom).5
Labor Productivity at Selected Car Manufacturing Plants, and Car Parent Companies or Subsidiaries in Europe
Citation: IMF Staff Country Reports 2025, 073; 10.5089/9798229005852.002.A002
The lower productivity of Slovak automotive plants compared to their parent companies and foreign subsidiaries reflects both their position in value chains and differences in capital returns. This gap can be attributed to two key factors: first, parent companies and subsidiaries typically engage in higher value-added activities along the value chain, including R&D, car design, and sales and distribution; second, they benefit from higher returns on intangible capital, particularly brand value, as exemplified by BMW Germany's exceptionally high productivity levels (Figure 11, bottom).
D. Policy Recommendations
14. Sustaining and boosting productivity growth in Slovakia is essential to generate the economic surplus needed to achieve higher living standards, address the fiscal challenges of an aging population, and finance the energy transition. While Slovakia's position offers opportunities for rapid catch-up growth, sustainable productivity improvements and the transition to an innovation-driven economy will require a comprehensive long-term strategy that strengthens its innovation ecosystem, reforms higher education, further improves its investment climate, and deepens capital markets.
15. At the macroeconomic level, government policies should prioritize investment in physical, human, and intangible capital to drive both renewed TFP growth and continued capital deepening. To achieve this, the government must maintain a favorable investment climate that sustains and redirects FDI to high-growth potential sectors like electric vehicles and other cleantech goods and services, while also enhancing their capacity to utilize EU funds effectively. At the same time, reforming the education sector (such as through the 2024 introduction of performance contracts in higher education) will help accumulate human capital, boost study efficiency, reduce skill mismatches, and limit net brain drain. Better educational outcomes will also support the transition to higher-value segments of value chains.
16. Given Slovakia's dependence on the automotive sector and recent weakness in industrial and agricultural productivity growth, policies should promote sectoral diversification and economic resilience. This will require targeted reskilling of the existing workforce and upskilling of new entrants to the labor market through expanded vocational training and education with a focus on competencies that are in high demand including digital and AIrelated skills. To address immediate labor market shortages, Slovakia could simplify its immigration procedures for skilled workers through a one-stop shop system. Additionally, the government should identify and support promising firms in emerging sectors for example by means of technical assistance (as provided by the Ministry of Economy), preferably with the potential to create spillovers to the broader Slovak economy. These measures would help address the observed secular productivity slowdown in traditional sectors while building new centers of excellence beyond ICE-focused automotive manufacturing.
17. Finally, firm-level evidence points to the need for stronger support of innovation and technology adoption. To help Slovakian firms catch up to domestic and global productivity frontiers, they will need to increase spending on applied and business R&D. Several potential avenues exist. First, in the short-run policymakers can encourage the uptake of existing R&D tax incentives by reducing administrative barriers, especially for small firms. Second, recent progress in developing retail bond markets is encouraging, but further deepening of domestic capital markets remains crucial. In this context, Slovakia could strengthen its startup financing environment through two key initiatives: nurturing Bratislava's venture capital ecosystem and supporting the EU capital markets union. The latter would facilitate cross-border capital flows, particularly equity and venture capital financing that startups need to grow. Third and last, in the long-run a strengthening of ties between the innovation ecosystems in Bratislava and other culturally and/or geographically proximate cities in Central Europe, such as Prague, would help create a more integrated innovation region that benefits from larger scale, deeper networks, and enhanced knowledge flows between research institutions and entrepreneurs, thereby fostering a “culture of growth” (Mokyr, 2016). These initiatives would serve multiple objectives: enable stalling frontier firms to catch up to the global frontier, help laggards and micro-firms with their convergence to domestic frontier firms, and support gazelles in their rapid expansion to drive aggregate productivity growth (IMF, 2024).
Appendix I. Data
A. Labor Productivity Growth in Frontier and Laggard Firms
Data Cleaning
The analysis of productivity growth in frontier firms and laggards is based on Bureau van Dijk's Orbis database. The Orbis data is cleaned following closely the steps described by Kalemli-Ozcan and others (2015), and Díez et al (2021):
Basic cleaning steps taken include the removal of duplicates, dropping zero-revenues firms, keeping only 12-month reporting periods, and removal of firms from the financial and public sectors (NACE codes 11 and 15).
Variable cleaning consisted of dropping observations with negative values in operating variables, financial expenses, and selected balance sheet items, dropping observations with any missing values in comprehensive balance sheet structure (current/fixed assets, current/non-current liabilities, shareholders’ funds and all their components).
Outlier removal based on: cost ratio (0.01 < total cost/ (material + labor costs) < 1); revenue/asset ratio (0.015 < ratio < 12); liability checks (0.9 < total liabilities ratio < 1.1); growth thresholds of employment, revenues, and assets by firm size, that is, -90 percent to 2000 percent for firms with less than 10 employees, -90 percent to 1000 percent for firms with 11-20 employees, -90 percent to 600 percent for firms with 21-50 employees, -90 percent to 400 percent for firms with 51-100 employees, and -90 percent to 200 percent for firms with more than 100 employees. After duplicate removal, cleaning, and outlier removal I end up with 95,997 firm-year observations for the period 2007-2023.
Analysis
I measure labor productivity (LP) as added value (in current EUR) per employee, and subsequently calculate its growth rate in percentages. Firms are organized into 2-digit NACE sectors. I use the sectoral categorization based on NACE REV. 2 from EU KLEMS (see Bontadini et al. 2023), which combines 13 manufacturing subsectors within section C with 18 1-digit sectors (A, B, D, E, F,… R, S) for a total of 31 sectors. I then take the following steps:
Firms are classified into three productivity groups within each NACE sector, namely the bottom 50 percent, the middle (50-95th percentile), and the top 5 percent (frontier firms). Classifications are made at the start of each period (2007, 2011, 2015, 2019).
For sample selection, only firms are kept that are present in the base year of each of the 4 distinct periods: 2007-2011, 2011-2015, 2015-2019, 2019-2023.
I then aggregate the firm-year LP growth observations into sector LP growth estimates by using each firm’s share in sectoral value added as its weight.
Next, the sectoral LP growth figures are then aggregated into four main sector aggregates (agriculture A, industry I, manufacturing M, services S) by using sectoral VA shares from EU KLEMS as weights. The use of these weights disciplines the calculation of aggregate LP growth as (firms from) certain sectors may be over- or underrepresented in the Orbis data. Before the aggregation I removed outliers if the sectoral growth rate > 75 percent or <-75 percent and replaced them with sector averages. Sector A corresponds to NACE code A; sector I corresponds to NACE codes B, D, E, and F; sector M corresponds to 13 subsectors within NACE code C; sector S corresponds to the remaining 1-digt NACE codes, namely G, H, I, J, K, L, M, N, O, P, Q, R, and S.
The final output consists of labor productivity estimates by industry (A, I , M, S) for different firm types (laggard, middle, frontier) for 4 different time periods.
B. Labor Productivity in The Automotive Industry
To analyze labor productivity in the automotive industry, I also rely on Bureau van Dijk's Orbis database. As before, labor productivity (LP) is measured as added value (in current EUR) per employee.
For Figure 11 top I compare labor productivity in Slovakia’s car assembly plants with other assembly plants in Poland, Portugal, and Spain. Selection of these plants is based on data availability and information retrieved via Google search to ensure the firm is an assembly plant or an average of multiple assembly plants. Observations are for 2022. If that year is not available for a particular plant, I take 2021. I make an exception for Stellantis Slovakia and take the observation for 2021 to make a fairer comparison with Volkswagen Palmela in Portugal for which only 2021 data is available.
For Figure 11 bottom I compare labor productivity across car company subsidiaries or parent companies in Germany, Spain, Italy, and Czech Republic. Selection is again driven by data availability. Google search is again used to ensure that the firm is either a subsidiary or a parent company. Observations are for 2022. If that year is not available for a particular plant, I take 2021.
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Prepared by Christian Bogmans (RES).
Using World Bank data, income levels of Western Europe and Eastern Europe are here defined as the GDP weighted average of GDP per capita (in 2011 int. $) of the following countries, that is, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom for Western Europe, and Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Moldova, Montenegro, North Macedonia, Poland, Romania, Serbia, Slovakia, and Slovenia for Emerging Europe.
National Bank of Slovakia (2022). Structural Challenges.
Capital deepening occurs when workers have better or more capital to work with. This includes the accumulation of physical capital such as factories and machines, but also ICT capital like computes, and intangible capital such as software, data, and brands. TFP growth, i.e., efficiency improvements not captured by measured inputs of capital and labor, happens when firms adopt recent technologies, when they improve management practices, and when other firms learn from then. Finally, the composition of labor improves if the workforce shifts towards more educated and/or more experienced workers.
Note that these cross-country productivity comparisons should be interpreted with caution, as multinationals often utilize transfer pricing to shift profits (costs) to low-tax (high-tax) jurisdictions, which could artificially inflate or deflate measured labor productivity in different locations.
