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“What Recovery?” Navigating the Productivity Slump

By Dennis Jones


Last week, The New York Times reported on a blockbuster economic study recently released from the think tank, Roosevelt Institute, which went to the root causes of our productivity slump and offered a provocative new explanation. The study, “What Recovery? The Case for Continued Expansionary Policy at the Fed,” details how macroeconomic output lags far behind pre-recession expectations (circa 2007). According to the report author, Roosevelt Fellow J.W. Mason, the twin culprits are low demand and investment. Together, they’ve conspired to leave labor and capital on the macroeconomic sidelines.

Let’s back up a bit. Even C-level decision-makers could be inadvertently unaware that we’re in the midst of a profound productivity slump. But we are. Productivity growth is at a nadir. A recent economic growth assessment put out by the Hoover Institution is even blunter in its assessment of the productivity slump: “The country is experiencing the worst five-year run for productivity ever measured outside of a recession.” In the last half decade, growth has slumped to less than a percent per annum. Contrast that with the relatively bullish 2.3 percent productivity growth that the U.S. experienced between 1947 and 2007. And although we are climbing out of the worst economic downturn since the Great Depression, productivity numbers remain stubbornly dismal. So what’s happening?

Well, first of all, it turns out that we haven’t really rebounded from the Great Recession. The Roosevelt Institute report points out that growth numbers, specifically labor force participation and productivity numbers, haven’t actually rebounded to pre-recession trend lines. In fact, they aren’t even in the ballpark. That’s troubling and contrasts with a more mainstream economic view that we are out of the woods.

What part do individual companies play in this economy-wide productivity slump? In the words of The Times, “American businesses are doing a terrible job at making their workers more productive.” Why? They aren’t investing in time and labor-saving innovations, like capital equipment or software. Instead, as The Times relays, they’re focusing their capital budgets on “smaller projects” that make only minor inroads in their efficiency numbers. Whether a slack labor market and stagnating wages are signaling to companies that they don’t have to invest as the price of staying in business is beside the point. The net effect is that companies are less productive than they could be.

But not all companies. There are indeed many instances of technology early adopters enjoying sizeable upswings in productivity as a result of deploying new innovations. As a result, those companies are furthering their competitive advantage in the market, leaving technology laggards in their wake.