Solving the productivity puzzle

Here is a brief excerpt from an article written by Jaana Remes, James Manyika, Jacques Bughin, Jonathan Woetzel, Jan Mischke, and Mekala Krishnan for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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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.

1. How micro patterns offer additional insight into the aggregate productivity slowdown
2. Why productivity growth is declining in advanced economies
3. What a sector view reveals about the slowdown and outlook
4. How to capture the 2 percent or more productivity potential of advanced economies
5. 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.

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Here is a direct link to the complete article.

James Manyika is chairman and director of the McKinsey Global Institute, where Jacques Bughin and Jonathan Woetzel are directors, Jaana Remes and Jan Mischke are partners, and Mekala Krishnan is a senior fellow.

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