The Other Crisis That Can’t Be Ignored

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A severe affliction is blighting some of the world's largest economies. It has resulted in a record-breaking drop in business efficiency, and in turn that is harming economic growth. Analysts don’t see any quick answers.

Of course, this may sound like the terrible fallout from the coronavirus outbreak that began to grip the world earlier this year. But it’s a different matter entirely, without any of the human suffering but still plenty of economic angst. It’s about worker productivity.

Yes, it’s an obscure economic indicator, which measures how much more the average worker produced this year than last year using the same inputs. Generally, it moves slowly and without obvious patterns—and as such, even alert economists tend to miss any pattern. But now, after many decades, the trend is very clear: it’s pretty much stagnant.

The phenomenon is perhaps best exemplified by a recent analysis from the United Kingdom. During the decade or so through 2018, the growth in Britain’s worker output fell to its lowest level since the 1700s. Yes, we are talking before the American Revolution. “The slowdown is unprecedented in the past 250 years,” states a recent paper from the UK-based National Institute of Economic and Social Research.

Productivity growth in the UK was less than 0.2 percent a year over the decade or so through 2018—far below normal trend growth of between 1 and 3 percent annually—and more recent data hasn’t shown significant improvement. Germany, the United States, and Japan, three of the top five economies, are all seeing similar trends with low productivity growth.

This “efficiency drought” matters because there are only two ways to ensure that the economy grows. You must have population growth or productivity growth, and preferably both, says Art Hogan, chief market strategist at National Securities Corporation in New York. If the population increases through birth or immigration, then the economy typically grows. Likewise, an economy expands when the people each produce more. Recent data shows the US is falling short on both counts. “In the US, the population growth is the worst in 20 years, and the productivity isn’t growing like it used to,” Hogan says. Eventually, that lack of growth will mean stagnating standards of living.

It is hard to know precisely why worker efficiency has stalled. Still, there are some likely culprits. It doesn’t help that measuring productivity has grown harder since the service sector grew so big; yes, we can see how many cars a group of workers can put through a production line, but it’s far trickier to figure out banking productivity. More worrisome, though, is the lack of corporate investment in newer, better machines. “Capital expenditure has been weak the past few years,” Hogan says. Think of it this way: If your boss buys superior equipment, then the workers can produce more units per hour. If the machines don’t get upgraded regularly, then efficiency suffers.

Meanwhile, recent technology breakthroughs haven’t delivered improved worker output in the same way as past advances have. Hogan points to the internet boom in the 1990s as a significant boost, because it allowed faster communication and opened up the world to the idea of web commerce. “That caused a huge surge,” he says. But the jury is still out on newer technologies, such as blockchain or artificial intelligence. “There is an argument that some new tech has not made us that much more productive,” he says.

And then there is the problem of government bureaucracy, says Steve Hanke, professor of applied economics at Johns Hopkins University. It keeps growing, of course, and the paperwork may be quietly stifling business on a large scale, particularly in banking and energy. Hanke puts it simply: “The regulations have put a cramp on productivity because you are spending half your time filling out forms.”

We all know of course that firms are pandemic-focused, but productivity is a mystery best solved sooner rather than later.