What Caused the Worldwide Productivity Slowdown?

Snail on map

At a time when business productivity should logically be speeding up, why is the opposite is happening?

While skimming the paper of my youth, the Washington Post, I came across the intriguing headline:

Productivity mysteriously goes bust

Writer Robert Samuelson goes on to say this about the apparent worldwide productivity slowdown:

What’s especially baffling is that, superficially, outside forces seem to favor faster productivity growth. Consider: First, the Internet, which promises cheaper ways to deliver goods and services. Next, “activist” investors, who push corporate managers to cut waste and lower costs. Finally, there is globalization, which means that more companies and laboratories — in China, India, Brazil and other “emerging markets” — are adding to scientific and technological knowledge.

But, data doesn’t lie. A new report from the Organization for Economic Cooperation and Development (OECD) compared the annual growth rates for labor productivity in 32 countries for two periods, 1995-2004 and 2004-2013. Every country but one (Spain) had slower productivity growth in the second decade than in the first. In particular, the United States’ productivity decreased from 2.2 percent to 1.0 percent.

Why is this happening? It depends on who you ask

Some say that the slowdown is a permanent phenomenon occurring because innovations that took place in the first half of the 20th century (e.g. electrification) are far more significant than anything that has taken place since then. In other words, the pace of technological progress has decelerated. Others claim the slowdown is the result of the recent financial crisis, which led to decreased investments in advanced manufacturing and other productivity-related innovations.

While OECD doesn’t necessarily agree with these speculations, it does cite a multitude of factors hampering productivity growth including demography, education, inequality, globalization, environment, and debt. It also names a decline in knowledge-based capital accumulation and business start-ups over this period as potential contributors. And the biggest problem of all, suggests OECD, is a slowing of the pace at which innovation spreads through the economy, known as diffusion.

How do we fix this?

OECD doesn’t claim this is an easy problem to solve, but it does offer some recommendations. For one, we must foster innovation at the global frontier and facilitate the diffusion of new technologies to firms at the national frontier. We must also support an environment where the most productive firms are allowed to thrive, thereby facilitating the more widespread penetration of available technologies.

Finally, we must reduce resource misallocation, particularly skill mismatches. Reviving diffusion and improving resource allocation, says OECD, has the potential to not only sustain and accelerate productivity growth but also to allow more firms and workers to reap the benefits of the knowledge economy.

Another layer of discussion

The OECD report is, of course, very academic. And if you ask workers what’s slamming their productivity, you hear a different story. Recall my post from February highlighting the recent State of Workplace Productivity Report. In it, Cornerstone on Demand cited the results of a study demonstrating that nearly 70 percent of American employees are suffering from an overabundance of work, and two-thirds feel that work overload is the most significant factor negatively impacting their productivity.

Employees in this decade also get less sleep than those in the early aughts, and this matters. Those who sleep for six hours or less a night are notably less productive than those who sleep seven or eight, according to a study of more than 21,000 UK employees carried out by researchers from Cambridge University and Rand Europe and reported in the Daily Mail.

So maybe…people are just tired?

What do you think is causing the productivity slowdown? Is it the confluence of economic factors suggested by OECD, a simple case of worker fatigue and burnout, or something else entirely?

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  • Paul Pittman

    Increasing productivity happens for a reason. For most of the last century it was to create more free time and disposable income to spend on it. Mission accomplished.