Solving the productivity puzzle PART II
What a sector view reveals about the
slowdown and outlook
Our sector analysis
provides an alternative lens to examine the macro trend of declining
productivity growth. We find the three waves played out in different ways and
to different degrees across sectors.
Few sectors illustrate
how this perfect storm impacted productivity growth across countries as well as
the retail sector. By the time the crisis hit in 2007, the retail sector was at
the tail end of an IT-enabled productivity boom through supply chain
restructuring that began around 1995. Then weak demand resulting from the
financial crisis and recovery made matters worse in two ways: through an
overall reduction in sales without a corresponding reduction in labor, and a
switch to lower value-per-unit products and brands.
As demand began to
recover and wages across countries remained low, retailers hired more than they
invested. In the middle of this slow recovery and challenging demand
environment, the rise of Amazon and the wave of digital disruption occurring in
the retail industry added to productivity growth from the shift to more
productive online channels, yet the growth was accompanied by transition costs,
duplicate structures, and drags on footfall in traditional stores.
In another example, in
auto manufacturing, a boom that began in the 1990s from a wave of restructuring
of global supply chains reached maturity by the time the financial crisis
occurred. When demand shocks hit, companies reacted by cutting investment and
reducing employee hours worked. As demand slowly improved, companies added back
hours, but they were slower to increase investment.
Today the industry is
in the middle of digital disruption from electrification, autonomous driving,
connectivity, and shared mobility trends. Original equipment manufacturers
(OEMs) are focused on the digitization of vehicle content, increasing
connectivity and adding infotainment features, and the evolution toward
autonomous vehicles.
Yet these digital
trends remain subscale. In 2016, only about 1 percent of vehicles sold were
equipped with basic partial-autonomous-driving technology. But today, 80 percent of the top ten OEMs have announced plans for highly autonomous
technology to be ready by
2025. If technology and regulatory hurdles are overcome, McKinsey
estimates that up to 15 percent of new cars sold in 2030 could be highly autonomous.
As financial crisis
aftereffects continue to dissipate and digital technologies are further
integrated into business processes, we expect productivity growth to recover
from current lows across sectors and countries. Overall, we estimate that the
productivity-boosting opportunities could be at least 2 percent on average per
year over the next ten years, with 60 percent coming from digital
opportunities. The opportunities we have identified include those that boost
operational efficiency, reduce costs, streamline labor requirements, and
enhance innovation (for example via automation) as well as those that are
reshaping entire business models and industries and changing barriers to entry
(for example, via online marketplaces and platforms).
How to capture the 2 percent or more
productivity potential of advanced economies
There is no guarantee
that the productivity-growth potential we identify will be realized without
taking action. While we expect financial crisis–related drags to dissipate,
long-term drags may continue, such as slackening demand for goods and services
due to changing demographics and rising income inequality and a rise in the share of low-productivity jobs;
all of these factors may be further amplified by digitization. At the same
time, the nature of digital technologies could fundamentally reshape industry
structures and economics in a way that could create new obstacles to
productivity growth.
While we found that
weak demand hurt productivity growth in the aftermath of the financial crisis,
looking ahead, there is concern that some demand drags may be more structural
than purely crisis-related. There are several “leakages” along the virtuous
cycle of growth. Broad-based income growth has diverged from productivity
growth, because declining labor share of income and rising inequality are
eroding median wage growth, and the rapidly rising costs of housing and education
exert a dampening effect on consumer purchasing power. It appears increasingly
difficult to make up for weak consumer spending via higher investment, as that
very investment is influenced first and foremost by demand for goods and
services, and rising returns on investment discourage investment relative to
earnings.
Demographic trends may
further diminish investment needs through an aging population that has less need for residential and infrastructure
investment. These demand drags
are occurring while interest rates are hovering near the zero lower bound. All
of this may hold back the pace at which capital per worker increases, impact company
incentives to innovate, and thus impact productivity growth, slowing down the
virtuous cycle of growth.
Digitization may
further amplify those leakages, for example if automation compresses labor share of income and increase
income inequality by hollowing out
middle-class jobs, and may polarize the labor market into “superstars” versus
the rest. Unless displaced labor can find new highly productive and high-wage
occupations, workers may end up in low-wage jobs that create a drag on
productivity growth. Our ability to create new jobs and skill workers will
impact prospects for income, demand, and productivity growth.
Digital technologies
may also dampen their own productivity promise through other channels. Various
digital technologies are characterized by large network effects, large fixed
costs, and close to zero marginal costs. This could lead to a winner-take-most
dynamic in industries reliant on such technologies, and may result in a rise in
market power that can skew supply chains and lower incentives to raise
productivity.
Furthermore,
increasingly sophisticated pricing algorithms and tailoring of offerings to
create markets of one could counter some of the improved market efficiency from
online price transparency and comparison and review offerings. We did not find
that rising concentration slowed productivity growth in our sector cases, but
this may not be the case in the future if changes in industry structure reduce
competitive intensity as well as incentives to innovate and improve operational
performance.
While the economic cost
associated with networks has been well established, digital platforms may
exhibit unique characteristics that make the implications different from past
network industries. For example, consider the network effects from digital
platforms such as Facebook and Google. Users of both platforms benefit from a
growing user base, as social networks with more users allow for more
connections, and larger pools of search data generate better and more targeted
results. Yet these services are free to users, who determine their success, as
revenue from advertising relies on the number of users. Therefore, incentives
remain for digital platforms to innovate and stay ahead of the competition to
ensure that they satisfy users, even though they may have strong bargaining
power with their advertisers.
What actions can be taken to promote productivity
growth?
Our findings suggest
that unlocking the productivity potential of advanced economies requires a focus on promoting
both demand and digital diffusion, in addition to interventions that help
remove traditional supply-side constraints such as red tape. To incentivize
broad-based change, companies need competitive pressure to perform better, a
business environment and institutions that enable change and creative
destruction, and access to infrastructure and talent. Yet additional emphasis
on digital diffusion and demand is warranted.
Demand may deserve
attention to help boost productivity growth not only during the recovery from
the financial crisis but also in terms of longer-term structural leakages and
their impact on productivity. Suitable tools for this longer-term situation
include: focusing on productive investment as a fiscal priority, growing the
purchasing power of low-income consumers with the highest propensity to
consume, unlocking private business and residential investment, and supporting
worker training and transition programs to ensure that periods of transition do
not disrupt incomes.
On digital, action is
needed both to overcome adoption barriers of large incumbent business and to
broaden the adoption of digital tools by all companies and citizens. Actions
that can promote digital diffusion include: leading by example and digitizing
the public sector, leveraging public procurement and investment in R&D,
driving digital adoption by small and medium-sized enterprises, investing in
hard and soft digital infrastructure and clusters, committing to the education
of digital specialists as well as consumers, ensuring global connectivity, and
addressing privacy and cybersecurity issues. Furthermore, regulators and
policymakers will need to understand the differences in the nature of digital
platforms and networks from the network industries of the past, and develop the
tools to identify non-competitive behavior that could harm consumers.
Other stakeholders have
a role to play, too. How do companies, labor organizations, and even economists
respond to the challenge of restarting productivity growth in a digital age?
Companies will need to develop a productivity strategy that includes the digital transformation of their business model as well as their entire sector
and value chain.
Boosting productivity growth starts
with companies. Google's Hal Varian suggests a simple way to jumpstart
productivity that also benefits employees.
In addition, they may
have to rethink their employment models and reskilling approaches in order to develop a
strategy, potentially together with labor organizations, that allows people and
machines to work side by side and workers and companies to prosper together.
Economists can play a key part by developing new and improved ways to measure
productivity and by developing models that can assess the impact of technology
on markets and prices.
While productivity
growth in advanced economies has been slowing for decades, the sharp downturn
following the financial crisis has raised alarms. We find that the most recent
slowdown is the product of three waves: the waning of a 1990s productivity
boom, financial crisis aftereffects, and digitization that holds the promise of
boosting productivity growth but remains subscale and comes with lags.
As financial crisis
aftereffects continue to recede, primarily as investment grows and uncertainty
diminishes, and as digitization accelerates, productivity growth should recover
from historic lows. How strong the recovery is, however, will depend on the
ability of companies and policy makers to unlock the benefits of digitization
and promote sustained demand growth.
There is a lot at
stake. A dual focus on demand and digitization could unleash a powerful new
trend of rising productivity growth of at least 2 percent a year that drives
prosperity across advanced economies for years to come.
By Jaana Remes, James Manyika, Jacques Bughin, Jonathan Woetzel, Jan Mischke, and Mekala Krishnan February 2018
https://www.mckinsey.com/global-themes/meeting-societys-expectations/solving-the-productivity-puzzle?cid=other-eml-alt-mgi-mgi-oth-1802&hlkid=b61bd974342948ba965398da3e7c1f69&hctky=1627601&hdpid=9015a6a5-3b49-4aaf-9c7e-4bbf310937de
No comments:
Post a Comment