Written by Steven Hansen
What is the cause of USA’s poor productivity growth?
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What is productivity? Productivity cut to the core is doing a task or activity with less effort or in less time. In my world, things either improve or degrade – it is very hard to keep things constant. Productivity is an important measure of progress. Since 2011, economists have been worried about the low productivity numbers they are calculating. Low productivity has been blamed for poor economic growth,
The St. Louis Fed published this past week:
As economies develop, their three main sectors – agriculture, manufacturing and services – tend to follow specific patterns:
- The agriculture sector shrinks.
- The service sector grows.
- The manufacturing sector grows initially, and then begins to decline in favor of the service sector.
In a recent Economic Synopses essay, Economist Ana Maria Santacreu and Research Associate Heting Zhu examined international trends in the manufacturing and service sectors. For the period 2000-14, the authors pulled sector data from 24 countries on:
- Employment
- Value added
- International trade (via exports)
- Innovation (via research and development [R&D] spending)
- Labor productivity (via value added divided by employment)
The share of each sector is shown in the table below.
Contribution of Each Sector
Sector Agriculture Manufacturing Service Share Employment 2.34% 16.92% 80.74% Share Value Added 4.61% 16.96% 78.43% Share Exports 6.90% 92.01% 1.09% Share R&D Spending 1.24% 64.86% 33.90% Productivity Growth 32.91% 42.32% 24.77% Federal Reserve Bank of St. Louis
SOURCES: Organization for Economic Cooperation and Development database and authors’ calculations.
In the above table, the productivity growth numbers were significant – so much so that I was a doubting Thomas. Those that read my posts know that I disagree with the methodology economists use to estimate productivity. Having done industrial engineering productivity calculations and monitoring, it is always humorous to me the contortions economists go through to produce productivity figures. There is no way one can accurately calculate productivity sitting in a chair in Washington, D.C.- and neither can I. But I am pretty good at using the back of napkins to ballpark productivity.
The USA productivity numbers I estimated were very close to the 24 country productivity growth shown in the table above.
Note: In the above graph, I fail to understand the productivity gyrations for agriculture. I can only attribute this to inaccurate employment counts in this sector. Unfortunately, some of the data needed to calculate 2017 is not available yet, but my guess is that the same trends would continue.
Takeaway from the last two years in the graph above:
- manufacturing productivity is contracting
- construction and retail productivity is improving.
Still, the cumulative productivity growth across all sectors is poor. One major cause of low productivity growth is performing more tasks to produce the same unit of work. Cars are more complicated. More is expected from data analysis (as well as more manhours go into data records). More manhours go to environment and control. Stock control became easier as workers now carry smartphones or other connected devices to document movements (this may not change productivity but it should lowers costs).
One rule in industrial engineering is to minimize the bloat caused by labor saving devices. In a viable company, department employment levels are seldom reduced after introduction of new technology – each person is given more tasks to fill their day.
Because of the advancements I see around me, it is certain that productivity is rising more than the numbers indicate. The tech sector is delivering significant labor saving mechanisms across all the economy including robotic workers. Productivity growth likely is not slowing, it is hidden by factors not visable to a bean counter in Washington, D.C.
Other Economic News this Week:
The Econintersect Economic Index for April 2018 strongly improved and returned to territory associated with more robust economic growth normally associated with expansions. After the last few months of mediocre data, this month much of the data significantly improved. The 3 month rolling average (which is the basis of our forecast) improved 16%. This is the highest reading since October 2017.
