A paradox of our time concerns productivity. We are awash in transformative technologies — smartphones, tablets, big data — and yet the growth in labor productivity, which should benefit from all the technology, is dismal. This matters. Productivity is economic lingo for efficiency, and it’s the wellspring of higher living standards. If productivity lags, so will wages and incomes.
The latest figures are disheartening. From 2010 to 2015, average labor productivity for the entire economy rose a meager 0.3 percent a year. If maintained over a decade, this molasses pace implies a puny 3 percent wage increase, assuming (perhaps unrealistically) that the gains are spread evenly over the labor force.
Historically, we have done much better. From 1995 to 2005, labor productivity increased an average of 2.5 percent a year, reports the Bureau of Labor Statistics. This would support a roughly 25 percent increase in wages and fringe benefits over a decade.
In a broad sense, the election is about reviving productivity growth, which would automatically ease our economic problems. Who doesn’t want higher wages, stronger consumer spending and heftier tax collections? But no candidate, from either left or right, has a plan to guarantee faster productivity growth — and none will.
Although productivity seems dry, it reflects something that is dynamic and amorphous — a nation’s economic culture, which includes its values, institutions, demographics, technologies, managers, workers and much more. Because it embodies so much, productivity is hard to influence and control. Economists have repeatedly failed. They regularly miss its turning points — productivity slowdowns and speedups. Neither the 1970s’ slowdown nor the 1990s’ pickup were anticipated.
Not surprisingly, the present slump has them stumped. It wasn’t predicted, and its causes are unclear. In a paper, economist Martin Neil Baily of the Brookings Institution reviewed some common candidates:
● Innovation has slowed, resulting in weak business investment.
● The Great Recession “clobbered the economy,” also weakening investment.
● Venture capital has retreated, making it harder for start-up firms to obtain financing.
● The productivity slowdown is a statistical mirage, because the value of “free” Internet services (Google, Facebook and the like) is underestimated.
Economist Robert Gordon of Northwestern University blames diminished innovation, but even he thinks that productivity should grow at least 1 percent a year. Meanwhile, a new study by economists at the Federal Reserve and the International Monetary Fund rejects undercounting of the Internet as a major cause of the productivity slowdown. “Free” services are counted, the study says; they’re valued at the cost that firms pay for Internet ads.
So the paradox remains: How can all the new technologies, with countless industries being “disrupted” and forced to change, coexist with such poor productivity performance? The answer may be simpler than we think. The economy is supporting parallel technologies — old and new — to do the same thing. The cost of the overlap is substantial, especially in a slow-growing economy still suffering from the Great Recession’s hangover.
The obvious example is retail. Traditional retailers, including big-box stores that once seemed invincible, face relentless competition from e-commerce. They can’t abandon their stores, which often remain the largest source of their sales and profits. (Despite rapid growth, online sales in 2015 represented only 7.3 percent of total retail sales.) But if they don’t invest heavily in digital technology, they will cede the future to Amazon and other successful digital firms.
Even powerful Walmart cannot escape this logic. In 2014 and 2015, its same-store U.S. sales, including e-commerce, were essentially flat. Yet, it made significant investments in its Web operations to defend against e-competition. Other industries straddle two technological eras. Newspapers publish print and digital editions. Phone service is split between expanding cellphone networks and receding landlines.
For the economy as a whole, this represents massive duplication. Businesses are splintering between wildly profitable firms and those that aren’t, argues White House economist Jason Furman. The same phenomenon may affect productivity. Some companies, presumably including many digital firms, are hugely productive. Many others are in the dumps, burdened by parallel technologies. It is the mediocre performance of this second group that drags down the economy’s overall productivity growth.
If this reasoning is correct (and, of course, it may not be), we have one explanation of how explosive new technologies can undermine average productivity growth, at least temporarily. Many Americans are now transfixed by the rowdy election campaign. But it is hardly a stretch to say that the country’s future may depend as much, or even more, on the fate of productivity as on the identity of the next president.
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