MGI assess productivity puzzle

The MGI (McKinsey Global Institute), the in-house think tank of the consulting giant McKinsey & Co, opened a 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 per hour whilst labour relaxed on a beach watching their productivity rise at the same time – but not here!

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, especially after 2008, 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:
    • Take the US auto industry – production fell 50% from 2007 to 2009 meaning the sector had tremendous excess capacity in the ensuing years even as the sector recovered
    • “Companies could fulfil a lot higher demand without having to make any new investments – typically the newest technology is implemented in the latest factories – people don’t upgrade a factory that can fulfil demand perfectly well” said Jaana Remes, a McKinsey partner
    • And when unemployment rates were at post crisis highs, employers could have their pick of good workers at relatively low prices – now, with jobless down to 4.1% in the US, good workers are harder to find
  • 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
  • A shift in employment from high-productivity sectors like manufacturing to lower productivity sectors such as health care and administrative and support services
  • 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
    • Overall, diffusion of new technology such as digitisation into everyday use is slow
    • “The time from commercial availability of new technology to 90% adoption ranges from about eight to 28 years – and most sectors in G7 nations have been slumbering for seven years at least
  • 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


MGI Conclusions:

  • As the economies return to full employment, an outburst of faster growth in productivity, and hence economic growth, is a real possibility
  • For the past several years, a lack of demand and plenty of spare capacity of both workers and equipment made businesses complacent and unwilling to invest in new equipment, software or new ways of doing things that might allow more output per hour of labour
  • Now, with companies having a harder time finding qualified workers and with demand for their products rising, they’ll have no choice but to re-engineer how they work to try to increase productivity
  • Higher productivity will in turn make it easier to justify higher wages, creating a self-reinforcing cycle of higher economic growth


Our Conclusions:

  • The overriding need of all G7 nations, and others, remains – hard-nosed practical solutions to the current, apparent, productivity puzzle
  • The MGI’s start point when researching ‘what drives productivity’ appears to be that ‘more output and GDP growth is good’ and that, in this context, ageing populations are bad – we disagree:
    • In the G7, GDP is a seriously flawed measure and should be dumped – and it doesn’t measure output anyway
    • Again, in the G7, more output is no longer the main aim – better standards of living and quality of lives will, in future, derive from better mental factors, not more material goods and services
    • And, in the new mental world we are now entering, ageing populations are a massive positive, not negative – they bring additional, currently untapped riches to the party, all of which can be bracketed under the heading ‘wisdom’



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