Here is an excerpt from an article based on report produced by Jaana Remes, James Manyika, Jacques Bughin, Jonathan Woetzel, Jan Mischke, and Mekala Krishnan for the McKinzsey Global Institute and featured in the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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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.
- How micro patterns offer additional insight into the aggregate productivity slowdown
- Why productivity growth is declining in advanced economies
- What a sector view reveals about the slowdown and outlook
- How to capture the 2 percent or more productivity potential of advanced economies
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 (Exhibit 1). 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
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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.