Since the end of the Second World War, waves of technical innovation have helped fuel more investment, adding to world incomes and capital, thus increasing worldwide wealth.
Since the banking crash and great recession of 2008-10, there has been low productivity growth in the UK as it has in the rest of the world, with further disruptions to economies from the Covid-19 lockdowns. US productivity, higher than European, only rose 0.8% a year between 2009 and 2019 despite the big surge in technology investment. It has led some to question whether we now need to live with a lower rate of productivity growth. They ask if this means bad news for savers and investors, reducing the returns that can be made.
How is productivity measured?
To explain the slowdown in productivity growth it is important to understand what productivity is and how it is measured. People are usually referring to labour productivity. This is measured by dividing the measured output an economy produces and sells by the number of employees needed to deliver it, or by the hours worked by the workforce. There are no value judgements made about the worthiness of the tasks or the hard work of the labour. It is assessed by the money received for the output compared to numbers of people or hours worked to achieve the sales.
This means that a small team of investment bankers earning large fees from merger advice are said to be much more productive than a team of nurses offering health care because they turnover so much more money per person. It means that an employee working in a very automated fossil-fuel plant is said to be more productive than people putting in loft insulation because, again, the output they are associated with sells for so much more money. Doing unpaid jobs at home does not get included, so a lot of work is unrecorded.
The power of automation
This also means that, for any given economy, the main ways to increase productivity is to put more capital behind every worker to boost their output – or to switch more people from lower-productivity sectors to higher ones. A construction company that still digs holes and trenches with shovels and picks will be much less productive than a company using diggers. There will be a few trained digger operatives in place of large numbers of labourers.
The more processes that can be automated in a factory the more productive each remaining worker becomes. It also means that economies that specialise in very capital-intensive activities will tend to have better labour productivity figures than those that have more labour-intensive activities. As economies switch labour from more automated industry to more labour-intensive services, so there will be an overall productivity effect. The better industrial figures will boost overall productivity, but the extra service sector activities may detract from the total.
It is difficult measuring productivity for public sector work which is often not charged to customers through prices for their use.
To deal with these quirks of the numbers some look at total factor productivity. This is an attempt to see what is happening both to the productive use of labour and of capital. It is only worthwhile spending a lot of money on labour saving equipment if that improves the overall balance between total costs and revenue from the product.
It is difficult measuring productivity for public sector work which is often not charged to customers through prices for their use but paid for from general taxation. Indices and figures are published and can show that an increasing public sector detracts from total productivity growth given the nature of the activities. Service quality may need more employees not less, as with education where people often value smaller classes or more one to one tuition. Allowing for quality in the crude numbers is a difficulty. If an economy contracts a very productive area like fossil fuel production and processing, which is very capital intensive, total productivity will be adversely affected.
Productivity and working from home
Since the financial crash and again since Covid-19 lockdowns there has been evidence of slower labour productivity growth rates both sides of the Atlantic. The great wave of investment in digital technology has brought some advances in labour productivity, but recently much more of that investment has been facilitating more working from home rather than more work being achieved. The green revolution promises more jobs in high productivity areas like the generation of renewable energy but is replacing highly productive jobs in fossil fuel energy and requiring the early retirement of lots of sunk capital in the older ways of meeting energy demand.
For any given country, a slowdown in productivity growth results from a mixture of forces. It may be the temporary or permanent loss of turnover from activities that score as highly productive like investment banking and oil and gas. It may be a further switch to services from manufacturing. It may be a growing public sector. It may be a general trend as societies age which sees more demand for people intensive services affecting the balance of GDP.
Should investors worry about falling productivity growth?
The productivity slowdown should not be a surprise, given the limits to automation, the shift to services and capital diversion to replace one way of making energy with another. There is still scope for more productivity gains from capital and technology as innovators strain to develop commercial uses for artificial intelligence and as software engineers find more labour saving programmes to help business. Investors need to recognise the overall slowing impact of lower productivity growth on real incomes but can benefit from the continued pressures to do more with less and to achieve more through new ideas.
This is an era of rapid change from both the digital and green revolutions, which will produce plenty of investment opportunities in those areas that are growing, whatever their level of labour productivity.
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