The word “productivity” has become a dirty one to many Americans. There is a perception that the more productivity goes up, the more jobs are lost. That’s not entirely wrong. Productivity is defined as the amount of output produced per input used – by inputs, we mean labor, equipment, etc. One way to get productivity growing is to reduce the amount of labor employed to produce the same amount or more. That can be achieved by laying off workers and capitalizing on new technologies, like Blackberries, to make the survivors more productive.
But is it really true that productivity growth leads to jobs losses? The McKinsey Global Institute says the answer is no. In a recent report entitled “Growth and Renewal in the United States: Retooling America’s Economic Engine,” MGI argues not only that gains in productivity have usually gone hand-in-hand with job growth, but also that greater productivity gains are absolutely crucial to maintaining American growth, and therefore, job creation and prosperity.
MGI makes a compelling case that the U.S. economy is facing a grim future if it doesn’t get productivity growth up to levels not seen in decades. The reason is changing demographics. With American society aging, the economy won’t get the same kick it got in the past from growth of the labor force, making the productivity of that force even more important in maintaining strong gains in GDP. Here’s a bit from the report:
The United States needs to accelerate labor productivity growth to a rate not seen since the 1960s…As baby boomers retire and the female participation rate plateaus, the US economy will receive significantly less lift from increases in the labor force and will therefore have to rely increasingly on productivity gains to fuel growth. In the first decade of the 21st century, productivity gains have already contributed 80 percent of total GDP growth compared with 35 percent in the 1970s. The expectation is that this trend of greater reliance on productivity for GDP growth will continue…If we look just at the last two decades and aim to recapture the 2.8 percent growth in GDP of that period, labor productivity growth needs to increase from 1.7 percent per year to 2.3 percent—an acceleration of 34 percent.
But does that mean jobs will be sacrificed in the quest for productivity gains? MGI says just the opposite is true. Historically, productivity gains and job creation have moved upwards together:
Since 1929, every ten-year rolling period except one has recorded increases in both US productivity and employment. And even on a rolling annual basis, 69 percent of periods have delivered both productivity and jobs growth.
Why has that been the case? MGI explains:
There are three reasons that productivity and job growth can—and often do—complement each other. First, there is the cost savings point…Cost-reducing productivity gains can, on aggregate, lead to higher employment if consumers benefit from those savings in the form of lower prices and spend them…Second, productivity growth is not only about reducing inputs for given output. Importantly, it is also about increasing the quality and value of outputs for any given input…Third, sustaining global competitiveness in many tradable industries requires ongoing productivity gains; strong productivity performance is therefore a necessary condition for attracting and maintaining local jobs.
The “virtuous cycle” between productivity gains, job growth and strong economic performance was on full display as recently as the 1990s, as MGI explains:
The productivity acceleration and rapid GDP growth that the United States enjoyed in the second half of 1990s was enabled by solid gains in both sources of productivity growth. Two sectors—large-employment retail, and very high-productivity semiconductors and electronics—collectively contributed 35 percent to that period’s acceleration in productivity growth This helped the private sector boost its productivity growth from 1 percent in 1985 to 1995 to 2.4 percent in 1995 to 1999. At the same time, these two sectors added more than two million new jobs.
However, in recent years, this usual trend has reversed, MGI says. Productivity has come at the expense of the American worker, and therefore, the bad impression Americans have of productivity gains has some validity:
The largest productivity gains since 2000 have come from sectors that experienced substantial employment reductions. Computers and related electronics, the rest of manufacturing, and information sectors have contributed around half of overall productivity growth since the turn of the century but reduced employment by almost 4.5 million jobs—more than 85 percent of which occurred before the onset of the recession. The sectors that added the most employment during this period tended to be ones with below-average productivity—notably the health sector.
So in order to reverse this recent pattern, the U.S. to get back to the 1990s style of productivity gains, based not on job cuts, but on improving the value of the economy’s output:
What the United States needs is to return to the more broadly based productivity growth that the economy enjoyed in the 1990s. During that period, strong demand and a shift to products with a higher value per unit helped to ensure that sector employment expanded at the same time that productivity was growing—reigniting the virtuous cycle of growth in which productivity gains spur increased demand, in turn leading to higher economic growth.
How can we get there? I posed this question to James Manyika, a director at MGI and one of the report’s authors. Here is his emailed response:
You can raise productivity (output per worker) by either cutting workers (ie, reduce the denominator) or increasing the value of output per worker (increase the numerator). In the 1990s, many sectors were able to innovate and raise the value of output per worker. This can happen by increasing the performance of products (think computers), shifting to higher-value goods (think retail), or redesigning processes to enable workers to do more (think Walmart). In the 2000’s, some of the highly productive sectors used technology and automation to instead replace labor (think manufacturing) Innovation is the key — developing new and better products that will spur demand.
So there’s the bottom line: innovation. To get GDP on the move and the job market on the mend, the US needs to focus not just on one side of the productivity equation – reducing the inputs – but also on the other side – increasing the value of output. That will take innovation, to develop better quality, more desirable, and thus more valuable products and services, or to invent new processes to allow each worker to produce more. So the pressure is really on corporate America, to put the resources and talent behind innovation, and on U.S. policymakers, to deregulate and support sectors of the economy that could generate such innovation or are lagging in productivity. The US still has an edge in innovation over emerging economies like China and India. So perhaps the outlook for U.S. jobs, and the U.S. economy, is better than those predicting gloom and doom believe.