The idea is simple: A nation’s productivity is calculated by dividing what it produces by the labor it took to provide those goods and services. What’s confounding economists is why productivity growth has slowed in many countries during the last decade, even as other economic gauges have improved. There’s a lot of disagreement on why — a mismatch between jobs and skills? Fewer innovations? Aging populations? Measurement problems? While the arguments can be arcane, a country’s economic well-being depends as much on productivity as it does on hotly debated topics like free trade or national debt. As Nobel Prize-winning economist Paul Krugman has said, productivity isn’t everything, but in the long run it’s almost everything.
U.S. productivity gains were almost halved in the past decade compared with their average from 1948 to 2006. In the U.K., it took eight years for productivity to finally return to the level it was at before the 2008 financial crisis. China’s productivity growth in 2016 slumped to a 16-year low. These anemic numbers worry economists and government officials, since sustained productivity growth is what ultimately raises living standards. (If workers are producing more per hour, there’s more output and income to share.) That’s why it’s critical to gauge its progress accurately. While it’s relatively easy to assess the efforts and output of factory employees, it’s harder with service workers. So the Organization for Economic Cooperation and Development is grappling with how best to construct data and compare progress across nations. Meanwhile, some measures by government agencies are lagging behind real-world changes. By late 2017, the U.S. Bureau of Labor Statistics plans to release results of its first survey of temporary workers since 2005. Yet the gig economy has been roaring for years — Uber drivers started ferrying passengers in 2010.
Adam Smith observed in his 1776 book, “The Wealth of Nations,” that advances like plows and grain mills lifted productivity. Henry Ford’s company introduced the assembly line in 1913, eventually reducing the amount of time it took to assemble a car from 12 hours to about 90 minutes; the price for a Model T dropped from $850 to under $300. In the mid-1950s, U.S. economist Robert M. Solow’s research on technology’s impact on productivity growth spurred other economists to look at all the elements that contribute to productivity. This led to a more complex measure called total-factor or multi-factor productivity, which calculates the efficiency with which labor and capital are used. Yet service workers’ efficiency remained hard to track. Former U.S. Federal Reserve Chairman Alan Greenspan said in 1998 it was “simply not credible” that output per hour in some service industries had fallen for two decades. He figured that mismeasurement was the likely cause.
Economist Robert J. Gordon argues that the surge of transformative innovation from 1870 to 1970 — mostly involving applications of electricity and the internal combustion engine — is unlikely to be matched in the future. Other economists suggest that productivity numbers may simply be wrong. Measurements in the services sector, which has grown to make up more than two-thirds of the global economy, remain a puzzle. For example, the productivity of U.S. hospitals has barely increased over the past decade, even as premature deaths from diseases have declined. Some analysts think today’s statistics aren’t capturing the benefits of advancements in information technology, like global positioning systems and mobile communications. Others suggest that current workers don’t have the skills needed for a modern workplace, or that sluggish business investment is hindering productivity growth. A group of optimistic economists say a new productivity leap is coming because societies have only just begun to exploit advances like robotics and artificial intelligence. European Central Bank President Mario Draghi and Fed officials say infrastructure improvements could help productivity growth. Better transportation systems speed the movement of workers and products; reliable electrical grids reduce downtime. U.S. President Donald Trump says he wants to invest at least $1 trillion in infrastructure “to ensure we can export our goods and move our people faster and safer,” though there hasn’t been much progress on that front.
The Reference Shelf
- A Harvard Business School article: “What Economists Get Wrong About Measuring Productivity.”
- Robert J. Gordon’s TED talk video: “The death of innovation, the end of growth.”
- House of Commons report on productivity in the U.K.
- A Federal Reserve Bank of New York blog post suggests that capital formation may be playing a role in low productivity growth.
- A study for Bloomberg BNA on problems U.S. businesses face from a lack of infrastructure investment.
- Bloomberg QuickTake on secular stagnation — the economic theory that slow growth may be permanent.
- In its series “Reviving Productivity,” Bloomberg View explores “why workers have stopped getting more efficient and what to do about it.”
First published Jan. 25, 2017
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Anne Cronin at email@example.com