Productivity is Stalling Worldwide
Economists are wringing their hands over a global decline in productivity growth that’s been underway for the past decade. According to a new report, this phenomenon threatens corporate profits, competitiveness and living standards.
The report, by The Conference Board, finds that this slowdown in productivity growth started before the 2008/2009 recession, though it was certainly exacerbated by it.
Total Factor Productivity (TFP) growth—which combines the effects of improvement in efficiency and technology and innovation – has all but collapsed. It fell from an average of 1.3% in 1999–2006 to just 0.3% in 2007–2014.
Don’t Blame the Workers
The United States saw average TFP growth fall from 1% in 1999-2006 to 0.2% in 2007–14, where it is projected to stay through 2025.
At the same time, labor productivity (output per worker) has fallen more modestly, from an average of 2.6% per year in 1999–2006 to 2.4% in 2007–2014.
In other words, workers are not the problem. Instead, suggests Conference Board chief economist Bart van Ark, the big declines in productivity growth come from the inability of companies and countries to translate investments in technology and innovation into timely gains in output.
This is a big reversal, and a head-scratcher, since it is these very investments produced a post-WWII revolution in global productivity.
A Threat to Living Standards
According to the report, productivity growth needs to be strengthened by as much as 60% in the next ten years to achieve the same growth levels as before the crisis.
This presents a huge challenge, especially for advanced economies like that of the U.S.A. You could say that the U.S. is addicted to productivity growth, since it is a big factor in enabling the country to compete with cheap-labor emerging economies.
Without productivity growth, U.S. workers fall further behind their counterparts in other countries, and living standards drop.
The “good news” in all of this is that the U.S. is not alone in suffering a slowdown in productivity growth. Indeed, the report finds that the problem is global, and affects developed as well as emerging economies.
Also, in terms of output per hour, the U.S. workforce remains by far the world’s most productive.
With that said, there is still much work to be done. The report outlines four key principles that, if followed, will allow companies to maximize their productivity potential:
- Understand that workforce matters most. Human capital advantages—in particular, continuous skills enhancement and high employee engagement—are strongly and positively correlated with productivity.
- Realize that innovation isn’t free. To translate new technology into enhanced productivity, a company must build an innovation culture. This requires higher investment intensity not only in human capital, but a range of intangible knowledge-based assets: R&D, software and data, business organization, marketing and brand capital.
- Let management lead productivity. Research has found a strong relationship between systematic management practices—including clear target-setting, performance tracking, and rewards for high performance—and productivity growth.
- Accept that competition will spur productivity. Intense competition fuels investments in productivity-enhancing measures that speed up adoption of technology, innovation, and improved work practices. Companies must avoid complacency and continuously assess their competitive and regulatory environments for changes that can be turned from risks into opportunities.
Productivity is an area that can either unite management and workers, or divide them. This global crisis threatens both company profits and workers’ living standards, so perhaps the best advice is for everyone to work together toward a solution.
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