Solving the productivity puzzle

Nine years into recovery from the Great Recession, labor-productivity-growth rates remain near historic lows across many advanced economies. Productivity growth is crucial to increase wages and living standards, and helps raise the purchasing power of consumers to grow demand for goods and services. Therefore, slowing labor productivity growth heightens concerns at a time when aging economies depend on productivity gains to drive economic growth. Yet in an era of digitization, with technologies ranging from online marketplaces to machine learning, the disconnect between disappearing productivity growth and rapid technological change could not be more pronounced.

In this report, we shed light on the recent slowdown in labor-productivity growth in the United States and Western Europe and outline prospects for future growth.

. . . Two waves have dragged down productivity growth by 1.9 percentage points on average across countries since the mid-2000s (Exhibit 3). The waning of a boom that began in the 1990s with the first information and communications technology (ICT) revolution, together with a subsequent phase of restructuring and offshoring, reduced productivity growth by about one percentage point. Financial crisis aftereffects, including persistent weak demand and uncertainty, reduced it by another percentage point, as investment was low even when hiring returned.

. . . A third wave, digitization, contains the promise of significant productivity-boosting opportunities, yet the benefits have not materialized at scale. There are several reasons that the impact of digital is not yet evident in the productivity numbers. These include lag effects due to the need to reach technological and business readiness, costs associated with the absorption of management’s time and focus on digital transformation, as well as transition costs and revenue losses for incumbents that can drag sector productivity during the transition. As a result, the short-term net impact of digitization is unclear.

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