Much concern is being expressed these days about technological unemployment driven by robotics, artificial intelligence, etc. But labor productivity numbers have been more in the direction of stagnation than in the direction of a sharp break upwards…see for example this BLS analysis. Note especially Chart 5, which compares productivity growth in three periods: 1947-2007, 2001-2007, and 2009-2016.
See also this piece, which looks at total factor productivity across continents.
So, what is going on here? Why have the remarkable innovations and heavy corporate and government investments in technology not had more of a positive effect on productivity? I have my own ideas, but am curious about what others think.
I’m wondering if changes to the composition of the work force (part-time, hourly and salary) during the current cycle could throw off the estimated work hours.
I’m pretty sure that the larger the proportion the government sector becomes the more the drag on productivity. But why would productive incentives matter?
I would guess labor turbulence (moving from job to job and in and out of the work force) has a dead weight loss in productivity if it is not being driven by market forces, but rather by regulatory intrusion, crony capital subsidies and inefficient government purchases (including contracting private firms).
The idea of the creative destruction mechanism being blunted by artifically low interest rates is very interesting, but I’m still trying to reconcil that with my understanding that banks maintained high lending standards. Some of the effect could be related to the increasing role of governments in picking winners and losers and the dead weight loss in bidding for such favors rather than tending the business of efficiency and innovation.
I do agree as well that diffusion of technological efficiencies can be blunted by lack of competition. It can also prove that newer is not always applicable broadly. I can believe small businesses have been increasingly consumed in dealing with labor and regulatory issues over the past nine years and have struggled to keep up with the whirl wind of technological development and opportunities as well.
Certainly our training and educational structures are not keeping up- another link to the trends in government.
Death6
The greatest increases in innovation and productivity come from entrepreneurs and new businesses, and they have been strangled almost out of existence. Another factor is family businesses. This may sound funny these days, but relatives work harder for each other, especially children. Minimum ages requirements don’t apply for kids working for parents.
But even if they wanted to employ family members, there are just fewer families around to do it.
Some factors I think are probably playing a part…
1…although a lot of technology has been developed and deployed, many of the implementations are pretty terrible. There are a lot of horror stories about so-called ‘Enterprise Resource Planning’ systems, in particular. As a consumer, almost every day one encounters clumsy customer-facing websites and sees employee frustration with their internal systems.
See also this story about a truly awful system implementation at Target in Canada, which I’ve linked previously.
2…excessive mergers/acquisitions/spinoffs. Although these are sometimes beneficial, often they are not and lead to tremendous amounts of legal costs, financial analysis costs, investment banking costs, and general wheel-spinning as integration is attempted or dis-integration is required.
3…bad organizational designs. Buzzwords about ‘teams’ and ‘de-leveling’ and ‘de-siloing’ have too often led to organization structures which are excessively mushy and do not properly incarnate the structure of the work to be done. (Ben Horowitz, whose book ‘The Hard Thing About Hard Things’ I recently reviewed, is one of the few recent writers to address organization design crisply and intelligently.)
4…excessive regulation and litigation
5…poor quality of K-12 and much college education, reducing employee effectiveness
The sociology of managerialism is necessarily opposed to disruption which innovation is defined by (as I write this I am awaiting a $6 billion company to hand back a signed NDA that I sent to them two months ago). And as industrialization has maturated to naturally greater girths of bureaucratic administration (due to so-called “organizational efficiencies” as deemed by the book ‘The Visible Hand’ which I generally agree with) innovation has become minute and slow. This has created what I would personally classify as a “Neo-Malthusian trap”, where population growth has exceeded the pace of creating a healthy rise in labor demand and the economically logical rise in labor wages.
And the creation of labor demand is done, yes by entrepreneurs, but furthermore successful entrepreneurs who are achieving scale, i.e. the growth of small businesses to larger firms. Now why is this not happening any longer?
1) entrepreneurial class has been shrinking despite the media sensationalism.
a) Joseph Schumpeter prognosticated a “vanishing of investment opportunity” which is logical; at this point in the industrialization life-cycle, we have seen a massive amount of agglomeration which acts as natural barriers to new-comer competition who can offer nothing materially better (think of a copy center business losing to Kinko’s, then Kinko’s being consolidated with FedEx)
b) The path of least resistance to acquiring wealth has over the last 50 years been climbing the corporate ladder, as emphatically documented by William H. Whyte in ‘The Organizaiton Man’. The risk/reward ratio in other words for entrepreneurialism is inhospitable, which has had a long-term consequence of depressing labor demand.
2) regulatory compliance.
This is where I found ‘The Visible Hand’s thesis to be most worthwhile. Conglomerations have economies of scale with handling bureaucratic paperwork that smaller firms do not. They also help write the rules which can close the gates on entrepreneurs from entering their markets. See electrodeposition as a good example of this.
3) the good life can be had easier.
This is a corollary to 1) (b) where the added lust for an entrepreneur to scale their enterprise requires additional risk; a restauranteur needing debt financing to expand his locations, or a microbrewery needing larger vats and marketing to grow their market share. Most entrepreneurs are content with being their own bosses and being big fish in a small pond with mild wealth rather than lavishness (see ‘Millionaire Next Door’).
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I suppose my general argument is that there is more capital than the people who have it know what to do with it. And I can’t help but grin at the cash on the balance sheets of our publicly listed overlords and the mass migration of savings into passively managed index funds because it shows I may have a point.
(and I apologize for the gross book-dropping, I just want to show that there is nothing new under the sun and it may guide some people for further reading)
In chart 6, perhaps the steady growth in labor productivity can be tied to automating business systems especially with the introduction and widespread usage of solid state computers and magnetic core memory starting in the 60s. Those machines eliminated huge quantities of clerks and other paper pushers. By the 1970s that low hanging fruit was picked and it wasn’t until the introduction of the PC in the 1980s that labor productivity took off again and then dropped in the late-aughts after that technology reached saturation. Just a WAG.
A CTRL-F on immigration results in no hits on the BLS paper.
Re my comments about excessive mergers/acquisitions/spinoffs….here’s an item from the WSJ a couple of days ago:
“After spending billions of dollars to scoop up rivals and build a conglomerate of household products, Newell Brands Inc. is reversing course, looking to unload brands and shed half its factories.
The company sells Sharpie markers, Elmers glue, Rubbermaid containers and Graco baby strollers. It more than doubled in size in 2016 when it acquired Jarden Corp., adding Yankee Candle, Mr. Coffee machines and Coleman camping gear to its portfolio.
But on Thursday, the Hoboken, N.J., company said it will focus on nine core consumer divisions and look to shed nearly everything else, including all of the company’s industrial and commercial businesses. Among the brands to go will be Rawlings baseball gloves and Goody hair accessories.”
So how much money and human effort was spent on doing these deals and then un-doing them? Quite a bit, I am confident.
Of course, you can’t expect everything to work, and this is of course also true of mergers & acquisitions. But there are a lot of forces over-incentivizing deal-making. If you are a corporate business development guy, and you do a big deal, it is a nice resume item…if it unwinds 5 years later, clearly that can’t be blamed on you…