Monthly Archives: January 2016

Slowdown in US productivity

Can the productivity puzzle be solved? Fresh analysis examines the issue and highlights opportunities for companies and policy makers to act on.

In the United States, productivity growth has declined sharply since 2004, yet digital technology has been widely apparent during this period. Even more startling, in 2016, measures of productivity growth flirted with negative territory. The answer to this puzzle holds the key to future prosperity, because now more than ever, as low birthrates slow the expansion of the labor force, the US economy depends on productivity improvements for long-term economic growth. Economists have proposed competing explanations for declining productivity growth but so far have failed to reach a consensus. That has left decision makers in the public and private spheres without a clear perspective from which to chart a path forward.

A McKinsey Global Institute discussion paper, The productivity puzzle: A closer look at the United States (PDF–449KB), undertakes a microanalysis and identifies six characteristics of the productivity-growth slowdown. These characteristics are low value-added growth during the recovery after the financial crisis; a shift in the composition of employment in the economy toward lower-productivity sectors; a lack of productivity-accelerating sectors after the financial crisis; weak capital-intensity growth; uneven rates of digitization across sectors, where the least digitized often are the largest sectors, with relatively low productivity; and diverging firm-level productivity, with slowing business dynamism.

A closer look at just one of these characteristics, the lack of productivity-accelerating sectors, is revealing (exhibit). The productivity performance of businesses and sectors does not slow down or speed up in unison. Rather, shifts in aggregate productivity growth are the result of individual sectors accelerating and decelerating at different times. The productivity boom of 1995 to 2000 was characterized by an exceptional combination of sectors experiencing a productivity acceleration. Sectors with large employment, such as retail and wholesale, experienced accelerating productivity at the same time as rapid productivity growth was occurring in sectors such as computer and electronic products. Together, these drove the productivity boom.

What executives think about the economy

This continually updated interactive tracks how executives around the world have viewed economic conditions and the economic prospects of their companies, and how those views have differed over time and across industries, regions, and types of company.

Every quarter since early 2004, McKinsey has asked executives from around the world about their expectations for the global economy, national economies, and their own organizations. Since September 2008, as these topics have grown in urgency, we have added additional questions, including some on customer demand and company profits.

This interactive feature will allow you to explore how different regions, industries, and types of companies have been affected by recent changes in economic conditions, and what executives expect to see in the future.

A McKinsey Global Institute discussion paper, The productivity puzzle: A closer look at the United States (PDF–449KB), undertakes a microanalysis and identifies six characteristics of the productivity-growth slowdown. These characteristics are low value-added growth during the recovery after the financial crisis; a shift in the composition of employment in the economy toward lower-productivity sectors; a lack of productivity-accelerating sectors after the financial crisis; weak capital-intensity growth; uneven rates of digitization across sectors, where the least digitized often are the largest sectors, with relatively low productivity; and diverging firm-level productivity, with slowing business dynamism.

A closer look at just one of these characteristics, the lack of productivity-accelerating sectors, is revealing (exhibit). The productivity performance of businesses and sectors does not slow down or speed up in unison. Rather, shifts in aggregate productivity growth are the result of individual sectors accelerating and decelerating at different times. The productivity boom of 1995 to 2000 was characterized by an exceptional combination of sectors experiencing a productivity acceleration. Sectors with large employment, such as retail and wholesale, experienced accelerating productivity at the same time as rapid productivity growth was occurring in sectors such as computer and electronic products. Together, these drove the productivity boom.

The reason of many households are not advancing

Incomes from wages and capital were flat or fell for two-thirds of households in 25 advanced economies between 2005 and 2014—an explosive increase from less than 2 percent in the previous decade.

While it’s broadly assumed that children will grow up to be better off than their parents, the reality is that a new generation of young people in advanced economies risks ending up poorer. In this episode of the McKinsey Podcast, McKinsey senior partner Richard Dobbs and McKinsey Global Institute (MGI) partner Anu Madgavkar talk with Peter Gumbel about the increase in the number of households that experienced flat or falling incomes in the past decade—and the implications for future growth and economic advancement.

 

Podcast transcript

Peter Gumbel: Hello, I’m Peter Gumbel, senior editor, based in Paris, at the McKinsey Global Institute. Today I’m delighted to be speaking with Richard Dobbs, a McKinsey senior partner in London, and Anu Madgavkar, an MGI partner based in Mumbai. Richard and Anu have been spearheading new research on income inequality for the McKinsey Global Institute, and they’re the coauthors of a new report called Poorer than their parents? Flat or falling incomes in advanced economies. One of its striking conclusions is that two-thirds of households in 25 advanced economies have been affected by this flat-or-falling-income phenomenon. They’re here today to explain what that is, why it’s happening, and what it means. Richard and Anu, thank you for being with me today.

Richard Dobbs: Hello.

Anu Madgavkar: Hi, happy to be here.

Peter Gumbel: Great. Let me start with you, Anu. What exactly do we mean by flat or falling incomes?

Anu Madgavkar: Our research look at groups of households organized by income segments. We’re then able to track what these typical groups have experienced in terms of income growth over the last decade and the period prior to that. When these typical households, in each income segment, see no advancement in terms of their income, we’re able to say that there is a general lack of economic progress.