America’s Productivity Problem

  • Share
  • Read Later
Getty Images

Would you like a raise? How about more vacation? Of course you would. If you’re anything like me, one of your main motivations each day at the office is the prospect of advancing, making more money, or even earning more time off to spend on the things outside your career that matter.

The main factor that makes any of this possible is rising worker productivity. The more efficiently we do our jobs, the more our employers can justify paying us — be it in salary or leisure. And one of the economy’s main weaknesses of late has been a decline in the growth of labor productivity, a dynamic that might help explain the plight of the average American worker in recent years.

On Friday, the Labor Department announced that labor productivity rose at just 0.9% in the second quarter of this year, after falling 1.7% in the first quarter. And these numbers aren’t an anomaly: According to a report issued last week by JPMorgan Chase economists Michael Feroli and Robert Mellman, worker productivity has only grown at an annual rate of 0.7% in the past three years, after averaging 2.9% growth from 1995 to 2005.

And as Feroli and Mellman point out, the decrease in productivity growth began even before the recession, and has coincided with a slowdown in technological growth, as measured by the pace in which computer equipment has become more affordable in recent years. According to the report, “Over the past few years the real price of information-processing equipment and software has declined at the slowest pace in more than a generation.”

(MOREMan vs. Machine)

So why does this change in the pace of technological advance matter? Economists believe one of the main factors that drive worker productivity is technology. As a firm invests in new technologies like new computers, software or high-speed internet, it enables its workers to get jobs done more efficiently. Over the past generation, we have seen an incredible decline in the price of high-tech equipment, which has driven much of our economic growth over that time period — especially during the boom years of the 1990s.

What the most recent numbers regarding prices of IT equipment imply is that the efficiency gains brought by the digital revolution may be petering out, and that will have a direct effect on our ability to become more efficient workers. And if we want to get back to the worker-productivity gains we were experiencing a decade ago, we need to somehow figure out how to encourage the kind of technological innovation that has led to previous waves of sharp productivity growth.

Of course, this raises the age-old question that economists have been arguing over for generations: What causes innovation? Conservative economists tend to believe that innovation is spawned mainly by the ingenuity of entrepreneurs. They rely on what is known as Say’s law, named after the classical economist Jean-Baptiste Say, which states that “supply creates its own demand.” When Steve Jobs designed the iPhone, for instance, there was no demand for the product. It’s creation created the demand for the product, which is now significant. Since the iPhone was launched in 2007, the smartphone market has exploded, and businesses across the world have invested in these products so that their workers can be constantly connected and work more efficiently. In this worldview, the entrepreneur is the instigator of growth, and therefore we must do what we can to avoid dampening his incentive to create.

(MORE: Feds Board Wrong Plane in Blocking US Airways–American Deal)

But the entrepreneur isn’t the only source of productivity growth. Firms can simply invest more in existing technology, intellectual property, and research and development. And it turns out that growth of this sort of spending has slowed from an average of 4.7% per year in 1980 to 2000, to 2.8% per year over the past 10 years, according to the report.

And when you ask businesses why spending on R&D isn’t growing as quickly as it was in the past, or why business investment in general hasn’t rebounded as it did after past recessions, they say it’s because of a lack of consumer demand. And this is why liberals tend to argue for government stimulus to jolt the economy into what they believe will be a self-sustaining virtuous circle of higher demand and growth — especially during a time when interest rates are so low and therefore the cost of action small.

If you get the feeling there’s a certain familiarity to this argument, you’re right. The debate over why productivity growth has slowed echoes many of the political debates going on right now, with one side stressing the ingenuity of the producer class, while the other emphasizes the health of the consumer class. Ideally, an economy would have a risk-taking entrepreneurial class and a healthy and confident consumer class. Right now we have neither, and we’re not quite sure which ought to come first.

30 comments
john29302
john29302

Statistics represent the companies that devise ways to be productive enough to compete. They are probably good at it. It dont reflect the majority of Americans, obese, dont even have a a mop or broom or dustpan. Wordsmiths that have cadillac taste and chevy budgets. hunchesd over an electronic gizmo eluding real work. Horders, fatties, lardasses, entitlement freaks, going to walmart buying stuff they dont need, mad at a friend that got a pulmonary disability check for smoking to much crack or meth, or a bad back that has healed so they must hide their strength for life or get the gravy train revoked. the 10 i know get 1250 a month for life. one burned a mans house down and set a trailer on it. cheap land. sits up there watching tv. another is a war veteran. was denied his check next thing i know hes tasered and 5 squad cars and taped off the house ambulance carries him offf and viola,,,he got his check now. another sectioned 8 his house and rents to friends with 3 kids on welfare while he sublets a room, and they work side work. experienced contractors and under table. that house pumps out over 6000 a month gov money. hey guess what? we are the smart ones for not doing it. get up early and hit it si FICA is paid up dummy. See how it works einstien? article is way off from real problem. in hte 30's food was short. now there is too much. no incentive to work hard is a THE problem.

DeadweightLoss
DeadweightLoss

This argument completely ignores the experience of the past 30 years.  After decades of moving very close together, productivity and wages have hugely diverged.  This can be clearly seen here: http://www.marylandpolicy.org/dnn/ResearchAnalysis/StateofWorkingMaryland/Productivity.aspx

Over the past 30 years, we have had solid productivity growth and our median wage has fallen.  It is horribly misleading to say that these variables still move together.  Recently, we have seen a massive increase in underemployment, where even students with high education and human capital have found themselves horribly underemployed as is analyzed here:

http://distilledmagazine.com/underemployment/

This is a case of weak demand, not weak productivity.

dream_king
dream_king

Interesting article, but it's hard to parse the presented thinking when the author makes no comment as to the labor productivity gains of the past three decades, and what trending relationship that had with workers' compensation.  The way it's presented, the author is making the case hat the reason workers' compensation is not improving is because we're not being more productive.  But clearly there's a history of when workers WERE being more productive yet weren't being paid in any strong proportional relationship to their productivity.   This was a trend before productivity started to wane for Americans, so it's questionable to present the issue as declining productivity alone.  That money went somewhere, and it wasn't to the workers.

If the author wanted to write an article about innovation drivers, he didn't need to bring up this simplistic, no-fault causality behind decreased demand and compensation.

Onepatriot
Onepatriot

Lots of intelligent thoughts out there about what's going on and what needs to happen to fix things.  But, the basic underlying thoughts of business execs seems to be that they are more focused on how much profit can be made than who's making that product, which they're making the money selling.

In other words, I think a lot could be gained if employers would return to the mindset that;  companies which are willing to create stable workplaces and can show loyalty to their work force will succeed and grow into the kind of business which becomes part of the fabric of the community.  Folks who live there, want those jobs then and vie for any openings that come up.  This is where today's unions come in.  They are willing to partner with business and they do help establish those workforces.  Today's employees value job security and show up each day at jobs that have it because they know that's rare in todays world.

Today's jobs aren't the same as they were 20 years ago and today's unions aren't the same either!

bocapope
bocapope

This was a simple and narrow explanation to declining productivity. Besides the plateau corporate America has reached in gains from technology, there are 3 reasons, which happen to correspond to low, middle and high income earners. Low wage jobs pay less in real dollars since the 30's & these workers have no incentive to give more. Middle income workers are too busy keeping their jobs rather than doing their jobs. Management jobs are filled by "yes" men instead of people who understand productivity. Then there are the big & rich getting millions whether or not they do well. Their high income and low contribution create a huge imbalanced drain on productivity.

rtrmicky
rtrmicky

Jobs just created a better mouse trap that's all. Smartphones had been out 13 years before the iPhone. Demand grew for his product because it was better that what was out there at the time. However, I do believe that supply can create demand but only when it's truly innovative. The microwave, now that was innovative, television, that was innovative, the iPhone was an improvement. So tired of hearing how great & innovative Jobs was.

US1776
US1776

Texting ate up all the productivity.


.

HazeAndDrizzle
HazeAndDrizzle

Bull. The productivity leap of the last fifty years has been hijacked and diverted to the super economic elite. There is no mystery that there has been a failure of distribution, not productivity. Ultimately that lowers everybody's boat. Increased productivity a Feudalistic society does not benefit the public. But if you take 100 times more than you deserve any relative drop in total gain is more than made up by your ill gotten gains. The rise of Wall Street ideology, financial perversion and devastation of industry after industry, the shift of taxation from the most powerful to the least powerful, the imposition of "at will" employment, the destruction of the ability to labor to influence corporate behavior, elimination of unions, the perversion of the legal system on behalf of the corporate elite, the disappearance of political options favoring public interest has led to the decline. Only Tea Partiers, deluded Libertarians, and the ultra rich think they have benefited of which only the last one really has.

txtravel
txtravel

This article was dumb, but there are some good comments (and how often do you say that?).  Professional Americans are certainly interested in personal advancement rather than the good of society - though they don't realize it.  More importantly, large demographic sectors of America are increasingly low-skilled, poorly educated, and uninterested in creating social goods - especially in the rural south and border, but also urban areas.  These aren't inevitable results of capitalism, they are the result of social choices - welfare, immigration, offshoring.  But liberals will doubtless use them to argue for more government stimulus. 

cheezaly
cheezaly

The productivity number is simply a ratio of output to hours worked. During the hard times companies got more out of the workers they were able to hold onto, and of course they retained the most productive. As the economy improves and demand rises they reach a break point and need to hire new workers. Those new workers need time to get trained and become productive so the number falls. For the most part older more experienced workers are more productive. Growth is the key and that includes growth in immigration. People are innovative by their nature, if there's an unsatisfied need someone will figure out how to fulfill it and be productive.

americandissonant
americandissonant

I'm just speculating here, but do Baby Boomers still hold most of the jobs in America? I know that at 60 I am a lot slower than I was at 30... slower to learn new skills and simply slower on my feet. Plus a lot of things that once got me excited now do nothing for me. Several older family members are mid-way thru Alzheimer's disease, and wondering how long my brain will still be lucid is becoming more of a preoccupation with me.

Another question: how does this story jive with the 3 Part Associated Press series on Jobs and Technology that came out last winter? The general thrust of the article was that advanced computers like IBM's Watson along with inexpensive robotics were hollowing out the entire job market, from maids and landscapers and warehouse workers on the bottom to paralegals and other research assistants and perhaps even top notch physicians and lawyers. The AP series concluded by stating that come the year 2090 AD, if current trends continue, 50% of all adult Americans who want to work will be unable to find a job. They simply will no longer exist in the numbers that they do today.

Is it time for the United states to adopt China's "one family, one child " policy? I think so!

SueBellingham
SueBellingham

There's the thing, author Christopher Matthews, to answer your statement -- I'm NOT like you. I care less about my personal advancement than I do society as a whole. I'm interested in technical challenge, you're interested in self-advancement.

And? Your idea of "productivity" is bogus. Selling a lot of smartphones may improve the GNP, but there's little evidence they improve productivity. Studies show that top Internet sites are YouTube and Twitter and Facebook. All of which are, statistically, about entertainment. There's nothing "productive" about them. And a study published a short while ago suggests using Facebook tends to make people lonely, because no deep relationships are usually formed.

Your perception of reality is wholly skewed by mass media marketing departments, who teach you that buying is the most important thing you do in your life.

douglynn23
douglynn23

IMHO, productivity is not increasing because of increasing government compliance overhead that slows everything down, job dissatisfaction as people are hanging on to jobs they do not like because of the economy, unions that prevent productivity changes, and technology distracting workers instead of helping them be more productive. Smart phones, in particular, are preventing people from being able to focus on their work. Too many email and text messages coming at us all day and bosses expecting us to respond rapidly is a part of the problem. Twenty extra interruptions a day costing us three minutes of refocus time for each is one more hour spent producing nothing.

SmoothEdward1
SmoothEdward1

Holy crap! Marxists around the world will celebrate this article because so many of the things they say capitalism will do are occurring before our eyes. Technological advancements were suppose to make our lives easier, not harder, give us more time, not less. The problem as I see it is our assumptions about the goals of capitalism and its impact on society have been radically altered. Too many people like to cherry pick a quote from Adam Smith or John Locke and use it to justify this greed-fest free-for-all we are living with now. If one actually reads those works you will find capitalism was designed to replace what came before it, a system that had concentrated the wealth into a tiny minority of hands. We now find that we workers are in competition with machines not being assisted by them, a competition we cannot win. Wages have been stagnant during periods of high productivity, and now the  decline in the increase or growth in productivity has slowed because of low consumer demand, that is being used to justify even more stagnation in hiring, wages, and benefits. It's important to highlight the words "a decline in the INCREASE of productivity growth." It's not as if workers haven't had every last ounce of work wrung out of them. If we are to preserve capitalism, we need to take a hard look at what it is becoming, and allow the words "social contract," to be uttered without ridicule. What is developing in our workplace and economy is just a dressed up version of what capitalism was supposed to solve. Wall Street's demands our creating havoc in our workplace and our  private lives. The Banksters need to dial back their demands and expectations.

turgeonmichael00
turgeonmichael00

How about drawing a correlation to the number of gov't jobs to the private sector?  I never a met a gov't bureaucrat any where near as productive as a private sector employee, innovator, etc.

Also, I believe there is a lag time for the productive use of technology.....as a 50+ adult.....I am learning and absorbing a lot about smartphones, interactive media, etc.  However, I am not yet

becoming more productive around these technologies........but I will!!!! 

bookcrazzzy
bookcrazzzy

The primary problem with the economy is income equality.  It has grown tremendously over the past 30 years with nearly ALL of the profits from increased productivity going to the owners, not the employees.  Income for the vast majority of the middle class have barely risen in that time period, even adjusted for inflation.  More and more of our wealth is owned by the upper class and invested rather than spent, thus the low consumer demand.  A larger piece of the pie needs to go to the middle class to boost consumption.  Republicans believe investment is primary and Democrats believe consumption is but the fact is we need both in the right balance and we don't have that any more.  Income equality is the highest it has been since before the great depression.  Why should workers worry about increasing productivity when they have seen no benefit from the tremendous increases in productivity over the past 30 years?  We work harder and longer for less money than we got in the 1980s. 

Sparrow55
Sparrow55

Spending on R&D isn't growing because of our short sighted bottom line obsessed way of doing business.  Investors want a quick return on the money they put into a company, forcing most executives to focus on nothing beyond the next quarter.  Since R&D can take years, or even decades, to bring a new product to market, investors don't see it as something that will help achieve the quick return they are seeking.  Investors tend to shy away from anything that looks even remotely like a science experiment.  As a result, business executives will put less funding into developing new products or technologies and focus on what can impact the bottom line (and the return on investment) now. 

JagdishBarot
JagdishBarot

To address the productivity issue:  Have you looked into misinformed management, or nepotism and resulting incompetence?  Many articles are published on the successes of the fads like Six Sigma or Total Quality Management or Just-in-Time, etc.   Many executives jump on the bandwagon of what is in vogue or in media hoping for an instant success.  For example, Six Sigma is a statistic derived from the data of almost 100% yield of a process, or 3.4 defects per a 1,000,000 opportunities to mess up.  Sounds appealing,   Many who bought into the idea of having Six Sigma realized it is counter productive, especially for the small companies that make very few products per order, which is 80% of the businesses.  But you never see it publicized, because there is no special interest behind it.

I urge you to use your journalistic talent to find out how SS almost bankrupted small companies.  You will be doing more justice to the readers.    

JagdishBarot
JagdishBarot

 Supply may create its own demand, but a limited one if it is not a well designed product.  Example, ipod vs competition or hp pad vs ipad.  iphone had a latent and potent demand.   Every consumer used to internet was awaiting a gadget that would empower them to access cyber space from anywhere.

HazeAndDrizzle
HazeAndDrizzle

@americandissonant No Feudalism will sort it out. America is showing the way back to the Middle Ages. And we are the kind of egregious dominated country to do it.

HazeAndDrizzle
HazeAndDrizzle

@douglynn23 Oh yeah the concentration of wealth has nothing to do it with. Impoverish people with corporate rapaciousness and all will be well. How do Libertarians have on shred of creditability left?

gumshoo
gumshoo

@turgeonmichael00 I have met more lazy people in private business than in government my friend.  Your argument only reflects your viewpoint.

gumshoo
gumshoo

@bookcrazzzy Totally agree.  And I wonder if Republicans understand that you can't get blood from a stone.  At some point the work force feels beaten down and they are consummately exhausted with nothing in site to relive them of the constant stress of spinning their wheels.  I would like to say that Republicans are not thinking this whole thing through - but in fact I think they are.  They are egotistical and causing suffering in others somehow brings they great joy - which baffles me.

CharlesBoyer
CharlesBoyer

@Sparrow55 These days, major companies are more likely to buy their R&D by acquiring smaller companies that have either innovated and are just entering the marketplace, or by gobbling up smaller firms that hold market shares, segments or perhaps simply the threat of gaining it that the larger company is interested in.

Alternatively, they may partner with a university and conduct research there. 

R&D is being done, it's just that in house, it's little "r" and big "D."

JagdishBarot
JagdishBarot

@Sparrow55 Yes, Sparrow.  Instead of spending in R&D, they go for the dreams of quick fix and quick returns, such as fads like Six Sigma.

mk045
mk045

@HazeAndDrizzle @douglynn23 Henry Ford wanted his employees to be able to afford his product.  That meant paying them enough to afford it.  That's a healthy economic ecosystem.  But when 1% hold 95% of the wealth, they also need to consume 95% of all that is consumed, or the whole ecosystem withers.  And withering it is.

The workers of today, even middle-class, white-collar workers, cannot afford to support the 1% any longer.  The situation is very much like that described for Social Security and Medicare, when 1/3 of the country is supporting the other 2/3 in their retirement/infirmity.

And when they cannot simply squeeze anymore, they 1% will (frankly has been) changing the laws to further tilt the playing field in their favor.  At some point it will simply break; there will be no more left to take.

ffoulkes
ffoulkes

@gumshoo @bookcrazzzy It is odd you feel that way considering Republicans and other conservatives make up a majority of the WORK force. 

humtake
humtake

@gumshoo @bookcrazzzy Well, not everyone want to be a Liberal who can stub their toe and then get FMLA for 3 months and sit on their couch doing nothing.  All the while the people who are having to work harder are having to do their job and the job of the Liberals who are exploiting the system.  It's a two way street.  Reps may be egotistical, but Dems are narrow-sighted and refuse to accept reality just as much as Reps like to make up their own.