Solving the productivity puzzle PART I
New research uncovers how three waves collided
to create historically low productivity growth but finds the potential for it
to recover to 2 percent or more.
Nine years into recovery from the
Great Recession, labor-productivity-growth rates remain near historic lows
across many advanced economies. Productivity growth is crucial to increase
wages and living standards, and helps raise the purchasing power of consumers
to grow demand for goods and services. Therefore, slowing labor productivity
growth heightens concerns at a time when aging economies depend on productivity gains to drive economic growth. Yet
in an era of digitization, with technologies ranging from online marketplaces
to machine learning, the disconnect between disappearing productivity growth
and rapid technological change could not be more pronounced.
In this report, we shed
light on the recent slowdown in labor-productivity growth in the United States
and Western Europe and outline prospects for future growth.
New research from the McKinsey
Global Institute sheds light on the recent slowdown in labor-productivity
growth in the United States and Western Europe and outlines prospects for
future growth.
While there are many
schools of thought, we find three waves collided to produce a productivity-weak
but job-rich recovery, with productivity growth falling on average to 0.5
percent in the 2010–14 period compared to 2.4 percent a decade earlier.
These three waves are:
the waning of a productivity boom that began in the 1990s, financial crisis
aftereffects including persistent weak demand and uncertainty, and
digitization. The third wave, digitization, is fundamentally different from the
first two because it contains the promise of significant productivity-boosting
opportunities, yet the benefits have not materialized at scale. This is due to
adoption barriers, lags, and transition costs such as the cannibalization of
incumbent revenues.
As financial crisis
aftereffects recede and more companies adopt digital strategies and solutions,
we expect productivity growth to recover. We calculate that the
productivity-growth potential could be at least 2 percent per year across
countries over the next decade.
However, capturing the
productivity potential of advanced economies may require a focus on promoting
both demand and digital diffusion in addition to more traditional supply-side
approaches. Furthermore, continued research will be needed to better understand
and measure productivity growth in a digital age.
How micro patterns offer additional insight
into the aggregate productivity-growth slowdown
Labor-productivity
growth has been declining across the United States and Western Europe since a
boom in the 1960s, and it decelerated further after the financial crisis to
historic lows. The extent of the recent decline varies across our sample of
countries. Sweden and the United States experienced a strong productivity boom
in the mid-1990s and early 2000s followed by the largest productivity growth
decline, which began even before the crisis. France and Germany started from
more moderate levels and experienced less of a productivity-growth decline,
with most of the decline occurring after the crisis. Productivity growth was
close to zero in Italy and Spain for some time well before the crisis, so
severe labor shedding after the crisis actually accelerated productivity
growth. While productivity growth has started to pick up recently, it remains at
or below 1 percent a year in many countries in our sample.
Any explanation of the
productivity puzzle should take into account not just these headline aggregate
productivity numbers but micro patterns of the slowdown. We identify three
patterns across our sample of countries. First, the recovery from the financial
crisis has been characterized by low “numerator” (value added) growth
accompanied by robust “denominator” (hours worked) growth, creating a job-rich
but productivity-weak recovery. This raises the question of why companies have
been increasing employment or hours without corresponding increases in
productivity growth (see Chapter 3 for more details. It also highlights the
importance of examining demand-side drivers for slow value-added growth and low
productivity growth.
Second, looking across
more than two dozen sectors, we find few “jumping” sectors today, and the ones
that are accelerating are too small to have an impact on aggregate productivity
growth. For example, only 4 percent of sectors in the United States were
classified as jumping in 2014, compared with an average of 18 percent over the
last two decades, and they contributed only 4 percent to value added. The
distinct lack of jumping sectors we have found across countries is consistent with
an environment in which digitization and its benefits for productivity are
happening slowly and unevenly.
Third, since the Great
Recession, capital intensity, or capital per worker, in many developed
countries has grown at the slowest rate in postwar history. An important way
productivity grows is when workers have better tools such as machines for
production, computers and mobile phones for analysis and communication, and new
software to better design, produce, and ship products, but this has not been occurring
at rates that match those recorded in the past. A decomposition of labor
productivity shows that slowing growth of capital per hour worked contributes
about half or more of the productivity decline in many countries
Why productivity growth is declining
in advanced economies
Two waves have dragged
down productivity growth by 1.9 percentage points on average across countries
since the mid-2000s. The waning of a boom that began in the 1990s with the
first information and communications technology (ICT) revolution, together with
a subsequent phase of restructuring and offshoring, reduced productivity growth
by about one percentage point. Financial crisis aftereffects, including
persistent weak demand and uncertainty, reduced it by another percentage point,
as investment was low even when hiring returned.
We have found from
our global surveys of bsiness that 47 percent of companies that are increasing their
investment budgets are doing so because of an increase in demand, yet 38
percent of respondents say risk aversion is the key reason for not investing in
all attractive opportunities. We also found weak demand dampened productivity
growth through channels other than investment such as economies of scale and a
subsector mix shift.
A third wave,
digitization, contains the promise of significant productivity-boosting
opportunities, yet the benefits have not materialized at scale. There are
several reasons that the impact of digital is not yet evident in the
productivity numbers. These include lag effects due to the need to reach
technological and business readiness, costs associated with the absorption of
management’s time and focus on digital transformation, as well as transition
costs and revenue losses for incumbents that can drag sector productivity
during the transition. As a result, the short-term net impact of digitization
is unclear.
We have found that
digitization has not yet reached scale, with a majority of the economy still
not digitized. The McKinsey Global Institute has calculated that Europe overall operates at only 12 percent of digital potential, and the United States at 18
percent, with large sectors lagging in both.
While the ICT, media,
financial services, and professional services sectors are rapidly digitizing,
other sectors such as education, healthcare, and construction are not. We also
see the lack of scale in our sector deep dives. For example, in retail, online
sales are two times more productive than store sales yet remain on average
below 10 percent of total sales volume and come with transition costs like
declining footfall in stores.
In addition, we find
companies are experiencing substantial transition costs. In a recent survey we
conducted, companies with digital transformations under way said that 17 percent of their market share from core products or services was
cannibalized by their own
digital products or services. Today, we find that companies are allocating
substantial time and resources to changes and innovations; however, these do
not yet have a direct and immediate impact on output and productivity growth.
As a result, we may be experiencing a renewal of the Solow Paradox of the
1980s, with the digital age around us but not yet visible in the productivity
statistics.
The importance of these
waves was not equal across countries. The first wave mattered more in Sweden and
the United States, where the productivity boom had been more pronounced, while
financial crisis aftereffects were felt more broadly across countries.
CONTINUES
By Jaana Remes, James Manyika, Jacques Bughin, Jonathan Woetzel, Jan Mischke, and Mekala Krishnan February 2018
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