Aug 06

C. MGI assess the productivity puzzle

McKinsey & Co, in particular the MGI (McKinsey Global Institute), opened their recent ‘discussion paper’ on the productivity puzzle afflicting the USA (and other developed economies) by stating: “Now, as low birth rates slow the expansion of the labour force, increasing productivity, the output we get from every hour worked, is more crucial than ever to promote GDP growth”

One might ask about the impact of labour-saving gear which could produce more output from every hour worked whilst increasing labour productivity at the same time

However, the MGI lists several possible reasons for the apparent decline in labour productivity growth over the last few years viz:

  • Significant under-measurement of productivity growth – many services which customers value highly are not even counted – some are offered free, such as mobile GPS, Google searches, Skype, smart-phone apps, cloud-based services – the same applies to a broad range of household activities – and the true value of many other services such as improvements in the quality of health care are not fully captured – this demonstrates the significant amount of actual GDP that is uncounted, uncountable or mis-measured

  • A shortage of demand and investment opportunities, plus weak investment – aka secular stagnation – weak demand is due to a propensity for consumers to save rather than spend or invest in a slow-growth economic environment plus an increasing share of total income going to high-income and/ or older households that are less likely to spend that extra income – weak investment due to businesses being hesitant, despite low interest rates, in the slow-growth climate

     Suggestion – Governments to unlock investment via smart tax reforms and regulatory measures

  • Today’s innovations are not as transformational as in the past – technological opportunities remain strong, especially in advanced manufacturing, energy and transportation plus large sectors such as education, health care, construction and government – nevertheless, a lack of incentives for change and institutional rigidity mean productivity has lagged in many sectors – or maybe it’s the Robert Solow paradox: “You can see the computer age everywhere but in the productivity statistics” where productivity gains from IT were not automatic and did not occur in all industries – big wins required significant changes to business processes – it was only when relatively large sectors in the economy, such as retail, made such changes that national productivity numbers ticked up noticeably

     Suggestion – Many more business leaders invest in productivity enhancing technologies

  • A shift in employment from high-productivity sectors like manufacturing to lower productivity sectors such as health care and administrative and support services

    Suggestion – Governments boost productivity in public and regulated sectors by increasing competition and leveraging technology

  • A lack of productivity-igniting sectors – different sectors have different productivity levels and growth patterns – sadly, nowadays, there is a distinct lack of accelerating sectors which are large employers too

  • Digitisation rates are uneven across sectors – digitisation includes hard/ soft/ firmware, data and data platforms, customer and supply chain interactions, business models, digitally-skilled workers and jobs – the media, financial and professional services have been rapidly digitising – not so other sectors such as education and health care – the digitisation gap is thus widening

    Suggestion – Until we see the large sectors digitise, we will continue to see innovation everywhere but in the productivity numbers

  • A lack of ‘best practice’ diffusion – the productivity gaps between high and low performing companies are widening – the OECD has found a growing divergence between the productivity levels of global frontier firms and the rest since 2001 – they interpret this as a symptom of slower productivity diffusion – frontier firms have continued to raise their productivity levels but the rest have not followed them

    Suggestion – Encourage broad adoption of BPs

All up, the MGI suggests a package of broad actions needed from government and business leaders, each one having equal priority, which address some but not all of the above possibilities – their paper is a ‘discussion paper’, not a final report – as such, it makes a useful start

Meanwhile, the overriding need of all G7 nations, and others, remains – hard-nosed practical solutions to the current, apparent, productivity puzzle


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