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US Productivity Has Slowed: Here’s How To Speed It Up

Power of Ideas
US Productivity Has Slowed: Here’s How To Speed It Up

What could the United States look like in 2050? I believe it could be a greener, more equitable, and more prosperous place. But here’s the catch: To realize this vision, we must become more productive.

And that has not been happening.

Productivity—doing more with less or more with the same—is the engine of growth and prosperity. But from 2005 to 2019, US productivity growth averaged only 1.4 percent. If we could get back to the 2.2 percent that prevailed from 1948 to 2019, we could add $10 trillion to GDP by 2030.

I am optimistic that we can.

For one thing, we have done it before—and recently. Beginning in 1996, productivity rose sharply to almost 3 percent over the next decade.

Second, there are fascinating innovations in areas like artificial intelligence, machine learning, nanotechnology, quantum computing, and clean energy that could lead to dramatic productivity breakthroughs.

Broad-based prosperity and a higher standard of living can only come from productivity growth.

And third, it is already happening in some pockets of the economy. Mining, information, finance and insurance, and wholesale trade have all seen above-average productivity since 2005. Except for mining, whose growth has been fueled largely by innovations in natural gas, the other sectors have one thing in common: They are highly digitized. That is no coincidence. McKinsey has found a strong correlation between productivity growth in a given sector and its level of digitization, and this has been true for decades.

But while digital innovation will certainly be a major productivity unlock, its full potential is not close to being tapped. That is a large part of the reason innovation has not yet provided the productivity dividend that we might expect.

Consider the information sector, which includes software, telecommunications, and internet publishing. It has performed strongly, racking up 5.5 percent productivity growth since 2005. But it accounts for only 15 percent of US working hours, meaning its impact is limited. On the other hand, sectors like health care and construction employ millions more Americans but have seen much lower rates of productivity growth.

There are also big differences within sectors. In manufacturing, for example, leading firms are more than five times as productive as the laggards. A cluster of more than 4,000 firms in the growing “Titanium Economy” show us the potential. These industrial-technology firms excel at innovation-driven organic growth and have outperformed the S&P 500. They pay their workers well, function as positive forces in their communities, and are generally early digitization adopters. And they succeed because they continually make investments designed to boost productivity. Such companies—and the ethos that drives them—are critical to creating broad-based prosperity.

But digitization and optimism can only take us so far.

The most productive companies don’t limit their investments to technology; they also place significant bets on complementary intangibles like R&D and intellectual property. And, perhaps most important of all, they understand that their success hinges on their people. The most successful leaders invest in their workforce, including on-the-job training programs and policies that make it easier for parents and aging workers alike to stay in the labor force.

To put a number on it, our research finds that leading firms invest 2.6 times more than their counterparts in intangibles. These investments can lead to a productivity J-curve, where the benefits of early investments may start small but accumulate over time to create substantial long-term value.

Productivity matters.

Broad-based prosperity and a higher standard of living can only come from productivity growth. In the long run, labor productivity and real wages are closely, if not perfectly, linked. Productivity growth will also be essential to address several looming challenges, including workforce shortages and sustainability. And while productivity growth will certainly change the shape of the workforce, history and research have shown that it is overwhelmingly a job creator and a job improver. Higher productivity drives more profit, and thus more investments and more employment, including jobs we can’t begin to imagine today.

Certainly, productivity growth requires change. But it is the way—the only way—to build a more prosperous and sustainable future.