Why Western Labor Productivity has been slowing since 2004
SEEN FROM OTHERS – In a new series, we ask experts from outside our community to share thoughts on lean-related topics. This month we meet an economist with an interesting take on the West’s productivity slowdown and its link to learning.
Interviewee: Chad Syverson, J. Baum Harris Professor of Economic, University of Chicago’s Booth School of Business
Roberto Priolo: Your research on productivity in Western countries is very interesting. In a nutshell, what are its main findings?
Chad Syverson: It is clear how labor productivity growth has been slowing down in the United States since 2004. Between 1995 and 2004 it grew by 3% each year, while since 2004 it’s grown half as fast, at a rate of 1.3% per year.
This is a very concerning trend because labor productivity essentially represents a speed limit on economic growth and in the long term it impacts our standard of living: had it kept growing at the 1995-2004 rate, the US GDP would be $3 trillion higher – which equals $9,000 per person. The same slowdown can be observed in the vast majority of OECD countries.
As much as some say that the slowdown is nothing but a result of a wrong measurement, the data speaks clearly. Critically, what this tells us is that digitization and innovation have failed to set our productivity on an upward trend, despite their much-advertised promise to guarantee growth for our companies and prosperity for our societies.
RP: A common argument seems to be that innovation has simply changed pace in recent years, favoring quick and frequent iterations over big breakthroughs. Think of concepts like continuous delivery, for example. In your mind, is this what might be giving us the false impression we are living in a world led by innovation?
CS: I can certainly understand why someone would look at the world today and at the products they use and think, “Wow, we have never seen more technological progress than we are experiencing now.” That is a lot of the motivation behind the arguments used by people who say the slowdown in productivity is just a matter of measurement. After all, look at all the technology around us, right? Truth is, I understand those arguments, but when you go dig into the data, things just don’t add up.
People have a sort of presentism when it comes technology. Products that change while we are using them tend to feel like ground breaking innovations, but what we seem to forget is that we have gone through big changes before. To go way back, when indoor plumbing came around it created a massive change in the way people lived their lives, while now it’s mundane and we don’t think of it as technological advancement. Every generation feels like they are technologically more advanced than previous generations, even though the pace of technological progress is in fact not as fast as we think.
RP: What are the reasons behind the slowdown in productivity growth? How does lean relate to this?
CS: The productivity growth we observed in the 1995-2004 period was a result of our ability to figure out ways to harness the gains from IT, so one theory is that our economies have squeezed out the easiest, lowest-hanging fruit ideas out of digitization and have not been able to identify ways to improve further.
What we also see is that the slowdown seems to impact “average companies” more than it does “frontier companies” – the former simply can’t keep up with the latter anymore. Fifteen years ago everyone was marching at 3% growth year on year, whereas now only industry leaders are going at that rate.
There could be many reasons for this, but one cause – of which we see a lot of evidence in history – is the difficulty of spreading best practice. Take Detroit automakers as an example: when lean came around as a better way to make cars, they struggled to take it on. First there was denial, then grudging acceptance, finally problems with the implementation of those principles. Only over time did lean become commonplace in the industry. I wouldn’t be surprised if that process has become more difficult in recent years for a number of reasons, and that might have contributed to the lower levels of productivity we are seeing.
Recent issues notwithstanding, Toyota is still a leader in automotive productivity. If anything, that tells us it is still a model worth following.
RP: What is the role of management in ensuring organizations become more responsive to change and more innovative?
CS: Management is critical and without it getting productivity growth is very hard. Organizations very rarely spontaneously make themselves better, and improvement is often the result of an orchestrated, coordinated attempt by management to rationalize the way things are done.
There are many issues today’s managers have to deal with, but the most urgent is perhaps the fact that information flows are really poor. It is still too common for divisions or individuals to withhold information because they think flagging up a problem might be dangerous. This makes it critical for management to think of better ways to delegate decision-making and encourage people to unearth problems as they occur.
Another important thing to remember is that there should always be awareness that the optimal way of doing things often changes. While change for change’s sake is not useful, we should never be complacent about our processes and always wonder why we are working a certain way and why a change might be necessary.
You can find Professor Syverson's research here