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.
In contrast, what is striking about the recent slowdown in productivity growth is the distinct lack of accelerating sectors, and the few that are accelerating are relatively small in terms of employment. During the boom, the number of accelerating sectors for many years exceeded 20 out of 60 sectors analyzed, and in some years, they accounted for as much as 30 to 40 percent of total hours worked. In 1995, for example, these sectors included retail trade, wholesale trade, finance, and computer and electronic products. Recently, only six sectors recorded significant acceleration in productivity growth—and they were responsible for only 2 to 7 percent of total hours worked and 5 to 8 percent of value added. These sectors included oil and gas extraction, petroleum and coal manufacturing, and transportation. This raises questions: Is the lack of accelerating sectors a temporary lull that will pass as soon as some industries hit a productivity spurt? Or are there common patterns between industries that may be more permanent barriers to productivity growth?
In addition to identifying characteristics of the productivity-growth slowdown, this paper raises other questions that will inform MGI’s research into productivity and growth over the coming months, with the hope of facilitating ongoing discussion about this crucial topic. While this paper focuses on the United States, many of the trends apply to other advanced economies.
Clearly, additional research is required to fully explain what has happened to productivity and to inform future prospects for productivity growth. However, from our initial findings, and drawing on a large body of MGI studies about productivity and global growth as well as digitization, automation, and specific industries, some productivity-enhancing opportunities are clear enough to act on and should help guide policy makers and business leaders in developing initiatives that will help boost productivity, without having to wait for additional research. These opportunities include unlocking investment, embracing technology and innovation, building 21st-century infrastructure, boosting productivity in public and regulated sectors, tackling the labor aspects of productivity (such as developing the talent pool and utilizing online talent platforms for better job matching), and embracing the energy-productivity challenge.
Download the discussion paper, The productivity puzzle: A closer look at the United States (PDF–449KB).