The curious case of missing global productivity growth
WORK smarter, not harder. This is one of the most surprising things your boss can tell you. But on a macroeconomic level, it matters. Growth can come from getting more labor (hiring more workers, or making existing workers work longer hours), more capital, or from using that labor and capital more efficiently – something called total factor productivity (TFP). This can come from the kind of brilliant inventions devised by Thomas Edison (pictured) or the lesser known but equally important developments such as the adoption of the moving conveyor belt to speed up assembly operations. Since there are limits to the amount of additional capital and labor, productivity is essential for long-term growth.
Measuring productivity is far from easy; it tends to be the residual when all other factors have been accounted for. The OECD says it can “often be a measure of our ignorance”. However, the attached table is very attractive. It comes from the US Conference Board (here’s the link, thanks to Gervais Williams of Miton and Andrew Lees of Macrostrategy Partnership for bringing it to my attention). And it shows that globally, total factory productivity fell last year, was flat the previous two years, and has barely budged since 2007. Before the crisis, it was growth at 0.9% per year.
The OECD has written extensively on the productivity issue and observes that there appears to be a pro-cyclical element
So it is perhaps not surprising that productivity has been sluggish during the biggest economic crisis since the 1930s. But recovery has been going on for a while. And what about the benefits of the Internet and other technological developments, which are supposed to change the economy? Northwestern University’s Robert Gordon would have the answer (see our review of his book); today’s inventions are far more transformative than Edison’s electrical developments, or the development of the automobile and the airplane. Others may object that the full benefits of new technology are not reflected in the data (you can check your email at midnight, if that’s a good thing).
But this is far from an academic matter. We know that in much of the Western world (and China) the workforce will be stagnant or shrinking in the future. Global capital investment is at the low end of its 50-year range (see this chart from the World Bank). So much will depend on productivity, as the OECD report mentions.
Productivity is expected to be a key driver of economic growth and well-being over the next 50 years, through investment in innovation and knowledge-based capital. Therefore, it is little wonder that the recent productivity slowdown has attracted a lot of interest, with the debate focusing on the extent to which the productivity slowdown is temporary, or a sign of more permanent things to come.
We may be impatient and the big benefits of the internet are yet to come (Edison’s work on the light bulb and electricity in the 1870s and 1880s but it wasn’t until 1945 that the full range of of electrical appliances in American homes). Or this cycle may be particularly unusual. We know that a few companies are still producing substantial productivity gains but monetary policy, by keeping rates low, may have curbed the forces of creative destruction; “Zombie” companies are kept alive, dragging down the productivity numbers. Whatever the reason, economic growth will not return until productivity picks up.