Monday, March 5, 2018

PRODUCTIVITY/ LABO(U)R SPECIAL ...Solving the productivity puzzle PART II

Solving the productivity puzzle PART II

 What a sector view reveals about the slowdown and outlook
Our sector analysis provides an alternative lens to examine the macro trend of declining productivity growth. We find the three waves played out in different ways and to different degrees across sectors.
Few sectors illustrate how this perfect storm impacted productivity growth across countries as well as the retail sector. By the time the crisis hit in 2007, the retail sector was at the tail end of an IT-enabled productivity boom through supply chain restructuring that began around 1995. Then weak demand resulting from the financial crisis and recovery made matters worse in two ways: through an overall reduction in sales without a corresponding reduction in labor, and a switch to lower value-per-unit products and brands.
As demand began to recover and wages across countries remained low, retailers hired more than they invested. In the middle of this slow recovery and challenging demand environment, the rise of Amazon and the wave of digital disruption occurring in the retail industry added to productivity growth from the shift to more productive online channels, yet the growth was accompanied by transition costs, duplicate structures, and drags on footfall in traditional stores.
In another example, in auto manufacturing, a boom that began in the 1990s from a wave of restructuring of global supply chains reached maturity by the time the financial crisis occurred. When demand shocks hit, companies reacted by cutting investment and reducing employee hours worked. As demand slowly improved, companies added back hours, but they were slower to increase investment.
Today the industry is in the middle of digital disruption from electrification, autonomous driving, connectivity, and shared mobility trends. Original equipment manufacturers (OEMs) are focused on the digitization of vehicle content, increasing connectivity and adding infotainment features, and the evolution toward autonomous vehicles.
Yet these digital trends remain subscale. In 2016, only about 1 percent of vehicles sold were equipped with basic partial-autonomous-driving technology. But today, 80 percent of the top ten OEMs have announced plans for highly autonomous technology to be ready by 2025. If technology and regulatory hurdles are overcome, McKinsey estimates that up to 15 percent of new cars sold in 2030 could be highly autonomous.
As financial crisis aftereffects continue to dissipate and digital technologies are further integrated into business processes, we expect productivity growth to recover from current lows across sectors and countries. Overall, we estimate that the productivity-boosting opportunities could be at least 2 percent on average per year over the next ten years, with 60 percent coming from digital opportunities. The opportunities we have identified include those that boost operational efficiency, reduce costs, streamline labor requirements, and enhance innovation (for example via automation) as well as those that are reshaping entire business models and industries and changing barriers to entry (for example, via online marketplaces and platforms).
 How to capture the 2 percent or more productivity potential of advanced economies
There is no guarantee that the productivity-growth potential we identify will be realized without taking action. While we expect financial crisis–related drags to dissipate, long-term drags may continue, such as slackening demand for goods and services due to changing demographics and rising income inequality and a rise in the share of low-productivity jobs; all of these factors may be further amplified by digitization. At the same time, the nature of digital technologies could fundamentally reshape industry structures and economics in a way that could create new obstacles to productivity growth.
While we found that weak demand hurt productivity growth in the aftermath of the financial crisis, looking ahead, there is concern that some demand drags may be more structural than purely crisis-related. There are several “leakages” along the virtuous cycle of growth. Broad-based income growth has diverged from productivity growth, because declining labor share of income and rising inequality are eroding median wage growth, and the rapidly rising costs of housing and education exert a dampening effect on consumer purchasing power. It appears increasingly difficult to make up for weak consumer spending via higher investment, as that very investment is influenced first and foremost by demand for goods and services, and rising returns on investment discourage investment relative to earnings.
Demographic trends may further diminish investment needs through an aging population that has less need for residential and infrastructure investment. These demand drags are occurring while interest rates are hovering near the zero lower bound. All of this may hold back the pace at which capital per worker increases, impact company incentives to innovate, and thus impact productivity growth, slowing down the virtuous cycle of growth.
Digitization may further amplify those leakages, for example if automation compresses labor share of income and increase income inequality by hollowing out middle-class jobs, and may polarize the labor market into “superstars” versus the rest. Unless displaced labor can find new highly productive and high-wage occupations, workers may end up in low-wage jobs that create a drag on productivity growth. Our ability to create new jobs and skill workers will impact prospects for income, demand, and productivity growth.
Digital technologies may also dampen their own productivity promise through other channels. Various digital technologies are characterized by large network effects, large fixed costs, and close to zero marginal costs. This could lead to a winner-take-most dynamic in industries reliant on such technologies, and may result in a rise in market power that can skew supply chains and lower incentives to raise productivity.
Furthermore, increasingly sophisticated pricing algorithms and tailoring of offerings to create markets of one could counter some of the improved market efficiency from online price transparency and comparison and review offerings. We did not find that rising concentration slowed productivity growth in our sector cases, but this may not be the case in the future if changes in industry structure reduce competitive intensity as well as incentives to innovate and improve operational performance.
While the economic cost associated with networks has been well established, digital platforms may exhibit unique characteristics that make the implications different from past network industries. For example, consider the network effects from digital platforms such as Facebook and Google. Users of both platforms benefit from a growing user base, as social networks with more users allow for more connections, and larger pools of search data generate better and more targeted results. Yet these services are free to users, who determine their success, as revenue from advertising relies on the number of users. Therefore, incentives remain for digital platforms to innovate and stay ahead of the competition to ensure that they satisfy users, even though they may have strong bargaining power with their advertisers.
What actions can be taken to promote productivity growth?
Our findings suggest that unlocking the productivity potential of advanced economies requires a focus on promoting both demand and digital diffusion, in addition to interventions that help remove traditional supply-side constraints such as red tape. To incentivize broad-based change, companies need competitive pressure to perform better, a business environment and institutions that enable change and creative destruction, and access to infrastructure and talent. Yet additional emphasis on digital diffusion and demand is warranted.
Demand may deserve attention to help boost productivity growth not only during the recovery from the financial crisis but also in terms of longer-term structural leakages and their impact on productivity. Suitable tools for this longer-term situation include: focusing on productive investment as a fiscal priority, growing the purchasing power of low-income consumers with the highest propensity to consume, unlocking private business and residential investment, and supporting worker training and transition programs to ensure that periods of transition do not disrupt incomes.
On digital, action is needed both to overcome adoption barriers of large incumbent business and to broaden the adoption of digital tools by all companies and citizens. Actions that can promote digital diffusion include: leading by example and digitizing the public sector, leveraging public procurement and investment in R&D, driving digital adoption by small and medium-sized enterprises, investing in hard and soft digital infrastructure and clusters, committing to the education of digital specialists as well as consumers, ensuring global connectivity, and addressing privacy and cybersecurity issues. Furthermore, regulators and policymakers will need to understand the differences in the nature of digital platforms and networks from the network industries of the past, and develop the tools to identify non-competitive behavior that could harm consumers.
Other stakeholders have a role to play, too. How do companies, labor organizations, and even economists respond to the challenge of restarting productivity growth in a digital age? Companies will need to develop a productivity strategy that includes the digital transformation of their business model as well as their entire sector and value chain.
Boosting productivity growth starts with companies. Google's Hal Varian suggests a simple way to jumpstart productivity that also benefits employees.
In addition, they may have to rethink their employment models and reskilling approaches in order to develop a strategy, potentially together with labor organizations, that allows people and machines to work side by side and workers and companies to prosper together. Economists can play a key part by developing new and improved ways to measure productivity and by developing models that can assess the impact of technology on markets and prices.


While productivity growth in advanced economies has been slowing for decades, the sharp downturn following the financial crisis has raised alarms. We find that the most recent slowdown is the product of three waves: the waning of a 1990s productivity boom, financial crisis aftereffects, and digitization that holds the promise of boosting productivity growth but remains subscale and comes with lags.
As financial crisis aftereffects continue to recede, primarily as investment grows and uncertainty diminishes, and as digitization accelerates, productivity growth should recover from historic lows. How strong the recovery is, however, will depend on the ability of companies and policy makers to unlock the benefits of digitization and promote sustained demand growth.
There is a lot at stake. A dual focus on demand and digitization could unleash a powerful new trend of rising productivity growth of at least 2 percent a year that drives prosperity across advanced economies for years to come.
By Jaana RemesJames ManyikaJacques BughinJonathan WoetzelJan Mischke, and Mekala Krishnan February 2018
https://www.mckinsey.com/global-themes/meeting-societys-expectations/solving-the-productivity-puzzle?cid=other-eml-alt-mgi-mgi-oth-1802&hlkid=b61bd974342948ba965398da3e7c1f69&hctky=1627601&hdpid=9015a6a5-3b49-4aaf-9c7e-4bbf310937de

No comments: