Higher productivity is the economy’s special sauce. Productivity refers to how much output a worker can do in an hour. When workers have better tools or the help of robots and artificial intelligence, they can make cars or process data much faster. Higher productivity typically leads to more goods and services available at a lower cost and increases in wages. Without it, economic growth is sluggish.
The early data in this recovery is promising. Worker productivity grew 4.3 percent in the first quarter, one of the highest rates in years, according to the Labor Department. Second quarter productivity slowed to 2.3 percent growth, but that’s still nearly double the anemic productivity the nation experienced in the decade after the financial crisis — an average of just 1.2 percent.
After the Great Recession, tech experts and economists struggled to understand why seeming breakthroughs with robotics and artificial intelligence were not translating into strong and sustained productivity during the rebound.
The optimism this time derives partly from Congress and the White House taking steps to make significant investments in physical and digital infrastructure, and partly from the coronavirus pandemic forcing rapid and widespread adoption of the digital economy, robots and artificial intelligence.
Conditions are ripe for productivity to remain elevated for years to come, according to analysts from Goldman Sachs and the McKinsey Global Institute. As policymakers run the economy hot, there’s heavy demand for products and services. There is also a worker shortage, which is forcing companies to innovate even more as they struggle to find enough employees to fill a record 10 million job openings. If a robot can do someone’s job, companies are trying it.
Some economists even say the United States could be on verge of a productivity boom not seen since the late 1990s.
“America used to do a lot more public investment and it used to grow faster. I don’t think that’s a coincidence. It seems like we are reentering an era of public investment,” said professor Erik Brynjolfsson, director of Stanford University’s Digital Economy Lab. He forecasts “a productivity surge that will match or surpass the boom times of the 1990s.”
Worker productivity averaged 3.1 percent from 1996 to 2004, according to Labor Department data, largely due to the personal computing revolution.
Economists have learned that new technological breakthroughs usually don’t cause a jump in productivity right away. The technology needs time to marinate so companies can test how best to deploy it in their industry. Brynjolfsson argues artificial intelligence and machine learning have now simmered long enough to make a dramatic difference. Others are not as convinced.
“AI is nothing new, and for more than a decade has replaced human customer service representatives by annoying voice-recognition systems without reviving growth,” argues Northwestern University economist Robert Gordon, author of “The Rise and Fall of American Growth.”
Most economists interviewed for this article predict a mini boom. They don’t see productivity rising as high as the late 1990s, but they think it could easily be higher than what occurred in the recovery after the Great Recession.
It’s common to see a bounce in productivity at the end of recessions largely because companies have laid off so many workers that those who remain work harder to pick up extra tasks and impress bosses enough to stay employed in a scary situation. Take for example 2009, when productivity averaged 3.6 percent. That bounce tends to fade. That’s why the real test will likely be in 2022 and 2023.
“So far it’s a mini boom, but it could turn out to be a bigger boom,” said James Manyika, chair and director of the McKinsey Global Institute, which forecasts productivity could be over 2 percent a year through 2024.
The pandemic forced many businesses to dramatically shift the ways they operate as it was unsafe to have workers in proximity to each other — or near customers. Businesses sped up their plans for automation and digitalization of routine tasks, sometimes 20 to 25 times faster than they had previously thought possible, McKinsey found. Even industries like meat processing that many thought would be one of the last to adopt robots began using them during the pandemic.
“I do think we are in a productivity boom,” said Diane Swonk, chief economist at Grant Thornton. “The pandemic forced us all to learn to use technologies at a rapid pace. It was tech adaptation on steroids.”
One example of technology improving productivity is in the shift in how quickly Americans embraced online ordering for food and groceries. In recent months, roughly half of Chipotle’s sales have come from digital orders through its own platform or other services like DoorDash, easing the company’s reliance on cashiers at a time when restaurant workers are tougher to find. Even as in-person sales have bounced back at lunch, digital orders are not declining, said chief executive Brian Niccol, enabling workers to process more orders.
“I think [digital ordering] is here to stay,” said Niccol in a Washington PostLive interview on last week. He predicted the revenue coming in from digital platform orders “will hold and will just keep growing from here.”
In warehouses and factories, there was more widespread use of robots during the pandemic, a trend that appears likely to continue. Pennsylvania’s Lehigh Valley, a warehouse hub, is seeing a surge in applications from companies wanting to build “high cube” warehouses that are much taller so robots can travel up and down to retrieve items from high shelves, similar to a giant vending machine. It is much faster than having people walk around a large warehouse to collect items.
Some companies are also finding ways to harness machine learning. Even pre-pandemic, companies were automating scheduling and various administrative tasks. Now more sophisticated work is being done increasingly by machines. Last month, California software company Cadence Design Systems unveiled a new software they dubbed Cerebrus, a homage to the largest part of the human brain. It’s used to make microchip engineers more productive. On a recent call with Wall Street analysts, Cadence executives said Cerebrus makes chip engineers 10 times more productive, the kind of gain that could ultimately lower chip costs, not to mention getting faster turnaround for new products.
“I believe Cerebrus is a fundamental breakthrough,” said Anirudh Devgan, president of Cadence Design Systems, on a recent earnings call.
Then there is the work-from-home trend. New research finds teleworking could add a 5 percent boost to productivity, largely because workers save time from not commuting to the office. They can use that time to work or recharge. While some workers are returning to the office, it looks increasingly likely that more people will be able to keep working remotely or in a hybrid plan with some days at home and some in the office. In July, 13 percent of Americans with jobs worked from home, down from 26 percent a year ago, Labor Department data show.
While it’s easy to point to recent innovations in workplaces, it’s more difficult to say how much of this will show up in the official worker-productivity data. The study on work-from-home productivity cautions that only a fifth of higher productivity from teleworking is likely to show up in the productivity data because the usual government measurement doesn’t take into account commute times.
“It looks like we’re on the cusp of a productivity boom, but you have to see it to believe it,” said David Beckworth, a senior fellow at the Mercatus Center at George Mason University. “The statistics coming out so far in this recovery show a productivity surge. Will that continue? It’s too early to know for sure.”
Another key dynamic is increased government investment in the economy. The $1.2 trillion bipartisan infrastructure bill that recently passed the Senate has received widespread praise among business leaders and economists. The decision to stimulate the economy has also created a lot more demand than normal coming out of a recession, which is helping drive continued productivity and business investment.
“Infrastructure investment certainly has the potential to improve our productivity,” said Julia Coronado, founder of MacroPolicy Perspectives and a former Federal Reserve economist.
The nation hasn’t seen this kind of public investment in years. Improvements in roads and bridges are much needed, but economists are most excited about the money in the bill to expand and enhance broadband, and research and development. Democrats are also working on a $3.5 trillion spending package that is more controversial, though some economists praise parts of that bill that would expand child care and paid leave to make it easier for more U.S. parents, especially mothers, to work.
“It won’t be a game changer to just fix roads and bridges. It will help at the margin, but it’s not transformational,” Coronado said. Instead, she noted that “creating more child-care infrastructure could cause the labor market to be more dynamic and drive stronger workforce participation from women.”
Higher productivity could also alleviate many of the nation’s top economic concerns. Inflation is currently running at a 13-year high, with many Americans citing it as a big worry. As prices for so many goods and services rise, workers can’t afford to buy as much. Productivity gains typically lead to lower prices since factories and offices can produce more, and it tends to bring higher pay as workers are seen as more valuable and effective.
In the medium-term, the biggest concern for the U.S. economy is the shrinking workforce. As baby boomers retire and population growth slows, there are simply fewer workers. Immigration helps with that burden, as do productivity increases that yield a higher output per worker.
“We are going to be short of young people. So all the tasks that were being done with the prior amount of the labor will have to be automated quite a bit,” said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. “There won’t be that many drivers available for Uber and garbage trucks and all that. It’s very clear. Something will have to give.”
A key argument from the White House economic team is that investments in “care infrastructure” such as paid leave, preschool for all, and more affordable eldercare and child care could help more people work. That could boost the number of women in the workforce, though not necessarily productivity.
“Now is the moment to put in place a long-term plan to build back America better,” President Biden said this week. “It starts with making investments that we know will make the economy more productive and lead to more growth over the long run.”
For many economists, it’s too early to buy into the really optimistic case that some technologists and politicians are making, but they say a mini productivity boom is a real possibility.