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.