A new McKinsey look at the role of productivity in sustainable growth

Our newest McKinsey Global Institute (MGI) report, Investing in productivity growth, looks at the factors that drive productivity to understand why it has slowed down. “This report does not run hundreds of pages like our earlier ones did,” laughs Chris Bradley, director and senior partner at MGI. “But it takes MGI’s same micro-to-macro approach to understanding productivity, the foundation of prosperity.”

Chris Bradley, MGI director and senior partner; Jan Mischke, MGI partner; Marc Canal, MGI senior fellow
From left: Chris Bradley, MGI director and senior partner; Jan Mischke, MGI partner; Marc Canal, MGI senior fellow
Chris Bradley, MGI director and senior partner; Jan Mischke, MGI partner; Marc Canal, MGI senior fellow

The report offers a big-picture view: grouping 118 countries into three lanes of growth—fast, middle, and slow—over the past 25 years. “This is one of the unsung, good news stories,” says Chris. “Median country productivity jumped sixfold over the past quarter century; salaries per worker grew from $7,000 to $41,000. This is a massive leap and we studied the extraordinary impact this has had in our Pixels of progress.”

In this post, Chris; Jan Mischke, an MGI partner, and Marc Canal, an MGI senior fellow, share their findings.

In simple terms, what does productivity measure, and why is it important?

Chris: Technically speaking, it is measured as GDP, or the amount of value created by each hour of work in a society. How many parts does one employee produce? How valuable is the information a service rep provides? It’s about getting more value and traction from our work in the same number or fewer hours.

Maintenance engineer working in a factory using robotic arm

Investing in productivity growth

Productivity is not like a miasma that’s in the air where everyone does a little bit. It rolls in waves through industries. And you cannot miss it—like the dot-com boom we saw in the 1990s created by forces such as the rise of digitization; the modernization of supply chains by big box retailers, such as Walmart; the impact of Moore’s law, making chips faster and cheaper. Rising prosperity—a higher standard of living—can come only from productivity growth in the long run.

What should readers take away from this research?

Marc: To me, it’s the fact that investment is so clearly the determining factor in growing productivity.

For example, the current “fast lane” growth economies (China, India, parts of Central and Eastern Europe, and emerging Asia) have a high level of investment in productivity, at 20 to 40 percent of GDP. They channeled it into improving infrastructure, urbanization, and technology.

Fifty percent of global productivity growth has come from China and India alone, which is not surprising. But it has also come from other places: Central and Eastern Europe and parts of emerging Asia like Vietnam and Bangladesh. If they maintain their pace, they could catch up—or “converge”—with the living standards of advanced economies. The dream of universal prosperity is real here. “Slow lane” economies, largely in sub-Saharan Africa, Latin America, and the Caribbean, have consistently underinvested and hence fallen behind.

But slow productivity is partially of our own making; investing is something that we can decide to do—and that’s what we hope leaders take away from this.

Since the global financial crisis of 2008, there has been a sharp, universal slowdown in productivity and investment, especially in advanced economies. What does this mean?

Jan: Even the United States, which had the highest labor productivity growth over the past 25 years, has only been at 1.6 percent per year. European economies ranged from 0.3 percent in Italy—close to 0—up to 1.0 percent in Germany or the United Kingdom, which is not great; and there is tremendous uncertainty here in terms of energy and competitiveness.

We never fully recovered from the massive slowdown following 2008. There was less investment—relative to accelerating employment growth—in building new plants or updating machinery and equipment. Only intangibles such as R&D and software held up.

Without the gains that come from improving productivity, we won’t be able to address our generational challenges: raising overall living standards, managing the net-zero transition, and addressing the needs of aging populations.

What is the outlook now?

Marc: There is reason for optimism, at least in the United States. Investment is picking up in a hot economy with full employment. Five US tech giants invested about $350 billion in R&D and capital expenditures in 2022 as part of a race to dominate in AI and cloud technologies. These are significant numbers: more than half of all EU public and private R&D combined.

Light dots and lines evolve into a pattern of a human face and continue to stream off the the side in a moving grid pattern.

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How will advances in AI impact productivity?

Chris: We believe we’ll see an absolute revolution in services and productivity; it will be an extraordinary thing that changes the world. AI could add between 0.2 and 0.7 percentage points to productivity growth by transforming how jobs are done. AI replaces human activity. As people move to higher value work, we will still get the activity, but we won’t have to do the hours, so there is a huge productivity dividend.

Can you put this macroeconomic view in perspective with our own work?

Chris: Overall, productivity is a really important topic for our firm. So much of our work is about helping organizations improve performance through technology, skill building, and organizational change. Productivity drives human prosperity—and our aspirations and efforts to achieve sustainable and inclusive growth.