solving the productivity puzzle

160 Pages·2017·4.19 MB·English

SOLVING THE PRODUCTIVITY
PUZZLE: THE ROLE OF
DEMAND AND THE PROMISE
OF DIGITIZATION
FEBRUARY 2018
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SOLVING THE
PRODUCTIVITY PUZZLE:
THE ROLE OF DEMAND
AND THE PROMISE OF
DIGITIZATION
FEBRUARY 2018
Jaana Remes | San Francisco
James Manyika | San Francisco
Jacques Bughin | Brussels
Jonathan Woetzel | Shanghai
Jan Mischke | Zurich
Mekala Krishnan | Boston
PREFACE
Few topics in economics today generate as much debate For their guidance, insight, and encouragement, we
as the productivity-growth slowdown in advanced would like to thank our MGI colleagues Michael Chui,
economies. While productivity growth has been declining Diana Goldshtein, and Sree Ramaswamy, together
in the United States and across much of Western Europe with Tera Allas at the McKinsey Center for Government,
since a boom in the 1960s, that decline accelerated and MGI Council members Eric Labaye, Scott Nyquist,
after the financial crisis. Exceptionally weak productivity Gary Pinkus, Sven Smit, and Eckart Windhagen. We are
growth in recent years has raised alarms at a time when very grateful for all the help we received from current and
advanced economies depend on productivity growth former McKinsey colleagues and in particular would like
more than ever to promote long-term economic growth to thank: Praveen Adhi, Míriam Álvarez, Konrad Bauer,
and prosperity. In an age of digital disruption, when Christian Begon, Andreas Behrendt, Simon Bills,
companies are focused on implementing digital solutions Urs Bingelli, Riccardo Boin, Adrian Booth, Jaap Bower,
and harnessing innovations such as automation and Andreas Breiter, Margaux Constantin, Andreas Cornet,
artificial intelligence, disappearing productivity growth Filippo Delzi, Maarten Duyck, Liz Ericson, Guenter Fuchs,
is even more puzzling. Yet for some time now, the only Nishant Garg, Anna Gomulec, José Luis Gonzalez,
consensus about what is behind this weakness is that Badri Gopalakrishnan, Eric Grunberger, Gaurav Gupta,
there is no consensus, leaving decision makers in both Vasudha Gupta, Philipp Härle, Ludwig Hausman,
the private and public spheres without a clear perspective Kersten Heineke, Russell Hensley, Anuj Kadyan,
from which to chart a path forward. Philipp Kampshoff, Chandan Kar, Szabolcs Kemeny,
Attila Kincses, Stefan Knupfer, Sajal Kohli,
This report is our attempt to help fill that gap. It expands
Dymfke Kuijpers, Laura LaBerge, Nicholas Laverty,
on a March 2017 discussion paper, The productivity
Sebastien Leger, Michael Linders, Tomasz Mataczynski,
puzzle: A closer look at the United States, that examined
Duncan Miller, Timo Moller, Steve Noble,
the slowdown from a micro and sectoral perspective.
Jesse Noffsinger, Tunde Olanrewaju, Scott Pearl,
It also builds on decades of McKinsey Global Institute
Arnout de Pee, Peter Peters, Raghav Raghunathan,
research focused on productivity growth from a supply
Esteban Ramirez, Kevin Rebbereh, Robin Riedel,
perspective. This report extends our analysis of the
Roger Roberts, Jesús Rodríguez, Matt Rogers,
productivity-growth decline from the United States
Eivind Samseth, Roland Schneider, Sebastian Schneider,
to Western Europe, uses a multisector approach that
Jules Seeley, Laurens Seghers, Celine Shan,
integrates supply and demand factors, and focuses
Emily Shao, Bonnie Shaw, Patrik Silen, Bruno Silva,
on the slowdown since the mid-2000s, as productivity
Vivien Singer, Bram Smeets, Christoph Sohns,
growth remains near historic lows in this period. Looking
Kara Sprague, Sebastian Stoffregen, Shannon Sweeney,
closely at this recent period allows us to identify short-
Maciej Szymanowski, Zubin Taraporevala,
term factors that are likely to be resolved and long-term
Andreas Tscheiner, Charlotte van Dixhoorn,
trends that are likely to remain in place, helping us to
Jasper van Wamelen, Jonas Wannefors, and
determine the potential for productivity growth in the
Bill Wiseman.
future. A final goal of our year-long research effort into
understanding the productivity-growth slowdown is to We would like to thank our academic advisers who
provide a way forward to restart productivity-enabled helped shape this report and generously offered their time
growth, one that reckons with new forces at work in a and feedback at every stage: Martin N. Baily, Bernard
digital age. L. Schwartz Chair in Economic Policy Development
and senior fellow, economic studies, Center on
This research was led by Jaana Remes, a partner of
Regulation and Markets at the Brookings Institution;
the McKinsey Global Institute; James Manyika, a senior
Richard N. Cooper, Maurits C. Boas Professor of
partner of McKinsey & Company and chairman of
International Economics at Harvard University; Hans-
MGI; Jacques Bughin, a senior partner of McKinsey &
Helmut Kotz, a visiting professor at Harvard University
Company and a director of MGI; Jonathan Woetzel, a
and a senior fellow of the Center for Financial Studies as
senior partner of McKinsey & Company and a director of
well as program director of the SAFE Policy Center, both
MGI; Jan Mischke, an MGI partner; and Mekala Krishnan,
at Goethe University; and Rakesh Mohan, senior fellow
a senior fellow at MGI. The project team included
at the Jackson Institute for Global Affairs, Yale University,
Manuel Ariztia, Marc Canal, Samuel Cudre, Susie Gomm,
and distinguished fellow at Brookings India.
Octavio Figueroa, Abhishek Gupta, Mac Muir, and
Ravi Ram.
We are very grateful for the collaboration and Frank E. Buck Professor of Finance, emeritus, at the
discussions we had with a range of institutions. From Stanford Graduate School of Business; Andrew Sharpe,
the Bank of England, many thanks go to Andy Haldane, founder and executive director of the Centre for the
chief economist, Sandra Batten, senior economist, Study of Living Standards; Michael Spence, professor
Patrick Scheider, economist, and Gabor Pinter, of economics at NYU; Chad Syverson, J. Baum Harris
adviser; from BEIS, Alison Kilburn, deputy chief Professor of Economics at the University of Chicago;
economist, Dan Mawson, senior economic adviser, Jean-Luc Tavernier, director-general of INSEE;
and Stian Westlake, economic and policy adviser to Ignazio Visco, governor, Banca d’Italia; Hal Varian, chief
the Minister of State; from CBI, Anna Leach, head of economist at Google and professor emeritus at the
economic intelligence, Mia Andersson, head of industrial University of California Berkeley; Axel A. Weber, chairman
strategy and regional policy, and Rain Newton-Smith, of the board of directors, UBS; Thomas Wieser, president
chief economist; from HM Treasury, Tom Aldred, of the Economic and Financial Committee of the EU; and
head of growth economics, Tom Yeomans, economic Guntram Wolff, director of Bruegel.
adviser, and Johanna Cowan, deputy director, financial
This report was edited and produced by senior
stability; from the National Bank of Austria, Ewald
editor Anna Bernasek, editorial production manager
Nowotny, president, and Peter Mooslechner, executive
Julie Philpot, senior graphic designers Marisa Carder
director; from the OECD, Catherine Mann, former chief
and Patrick White, graphic design specialist
economist and head of the economics department,
Margo Shimasaki, and senior data visualization editor
Andrew Wyckoff, director for science, technology
Richard Johnson. Rebeca Robboy, MGI director of
and innovation, Dirk Pilat, deputy director for science,
external communications, managed dissemination and
technology and innovation, Dan Andrews, deputy head
publicity, while digital editor Lauren Meling provided
of the Structural Policy Analysis Division, Economics
support for online publication and social media. We thank
Department, and Chiara Criscuolo, senior economist;
Deadra Henderson, MGI’s manager of personnel and
and from the Peterson Institute for International
administration, and MGI knowledge operations specialists
Economics, Adam Posen, president, and senior fellows
Timothy Beacom, Karen P. Jones, and Nura Funda for
Olivier Blanchard, Jacob Funk Kirkegaard, Nicolas Véron,
their support.
and Jeromin Zettelmeyer.
We are grateful for all of the input we have received, but
For their invaluable discussions and insights, many thanks
the final report is ours, and all errors are our own. This
go to: Philippe Aghion, Robert C. Waggoner Professor
report contributes to MGI’s mission to help business and
of Economics at Harvard University; Nick Bloom, William
policy leaders understand the forces transforming the
Eberle Professor in the Department of Economics at
global economy, identify strategic locations, and prepare
Stanford University; Claudio Borio, head of the Monetary
for the next wave of growth. As with all MGI research, this
and Economic Department at the Bank for International
work is independent and has not been commissioned
Settlements; Diane Coyle, professor at the University of
or sponsored in any way by any business, government,
Manchester; Romain Duval, adviser in the IMF research
or other institution. We welcome your comments on the
department; John Fernald, senior research adviser,
research at [email protected].
international research, at the Federal Reserve Bank of
San Francisco; John Haltiwanger, Dudley and Louisa
Dillard Professor of Economics and Distinguished Jacques Bughin
University Professor of Economics at the University of Director, McKinsey Global Institute
Maryland-College Park; Jonathan Haskel, professor Senior partner, McKinsey & Company
of economics at Imperial College Business School, Brussels
Imperial College London; Richard Heys, director, deputy
James Manyika
chief economist, Office for National Statistics; Stefan
Chairman and director, McKinsey Global Institute
Imhof, director general for coordination at the Austrian
Senior partner, McKinsey & Company
Federal Chancellery; Jean-Herve Lorenzi, chairman,
San Francisco
Cercle des Economistes; Thomas Philippon, professor
Jonathan Woetzel
of finance at the Leonard N. Stern School of Business,
Director, McKinsey Global Institute
New York University; Sir Christopher Pissarides, the
Senior partner, McKinsey & Company
School Professor of Economics and Political Science and
Shanghai
Regius Professor of Economics at the London School of
Economics; Peter Praet, member of the board and chief
economist, European Central Bank; Myron Scholes, February 2018
© Alengo/E+/Getty Images
CONTENTS
HIGHLIGHTS In brief Page vi
45
Executive summary Page 1
1. An overview of the productivity-growth slowdown Page 23
Following a job-rich, productivity-weak recovery from the financial crisis, productivity growth
Exceptionally weak capital
intensity growth stands out remains near historic lows across many countries today.
as a pattern
2. Patterns of the slowdown Page 39
88
Productivity patterns show a broad-based slowdown across countries, with too few and too
small jumping sectors, while capital intensity growth rates remain at postwar lows.
Retail: all three waves 3. Why productivity growth is near historic lows Page 55
collided to shape productivity
growth Two waves, the waning of a productivity boom that began in the 1990s and financial crisis
aftereffects, dragged down productivity growth while a third, digitization, is under way.
109
4. A sector view Page 77
Six sectors—automotive, finance, retail, tech, tourism, and utilities—highlight how the three
waves have impacted productivity growth since the mid-2000s.
Rising inequality could hold
back productivity growth
5. Capturing the productivity potential of a digital age Page 105
Productivity could grow by at least 2 percent a year on average across countries, but
capturing that potential requires a focus on promoting demand and digital diffusion.
Technical appendix Page 129
Bibliography Page 141
IN BRIEF
SOLVING THE PRODUCTIVITY PUZZLE:
THE ROLE OF DEMAND AND THE
PROMISE OF DIGITIZATION
Labor productivity growth is near historic lows in the United States and much of Western Europe.
While growth in labor productivity has been slowing since the 1960s in many of these countries,
the sharp drop to an average of 0.5 percent in 2010–14 from 2.4 percent a decade earlier has been
particularly concerning. We attempt to shed light on this puzzle with economy-wide analyses,
industry case studies, and corporate surveys, and draw implications for the future.
ƒ We find there has been a job-rich but productivity-weak recovery, with low value added but high
hours worked growth, and a broad-based decline with a distinct lack of productivity-accelerating
sectors. While there are many schools of thought, we find three waves explain those patterns and
the decline.
ƒ Wave 1: The waning of a productivity boom that began in the 1990s dragged down productivity
growth by about one percentage point. Around 2005, a decade-long productivity boom from a
PC, software, and database system ICT revolution and the restructuring of domestic operations
and global supply chains was ending. By then, retail supply chain management tools were
broadly implemented and manufacturing offshoring momentum slowed.
ƒ Wave 2: Financial crisis aftereffects, including weak demand and uncertainty, caused another
percentage point drag. After the crisis hit, sectors such as financial services went from boom
to bust, and companies reacted to weak demand and uncertainty by holding back investment,
driving capital intensity growth down to the lowest rates since World War II. Weak demand further
depressed productivity growth through negative economy of scale effects and downshifts in
product and service mix. For example, in finance, growth in loan volumes dropped by about
10 percentage points or more across many countries.
ƒ Wave 3: Digitization, often involving a transformation of operating and business models, promises
significant productivity-boosting opportunities but the benefits have not yet materialized at
scale. This is due to adoption barriers and lag effects as well as transition costs; the net effect on
productivity in the short term is unclear. For example, in retail, online sales are two times more
productive than store sales yet remain on average about 10 percent of total sales volume and
come with transition costs like declining footfall in stores. Our surveys and sector analysis show
that transition costs can include an initial duplication of structures and investment, cannibalization
of incumbent business, and the diversion of management attention.
ƒ The waves had different effects on countries. Sweden and the United States had a particularly
strong ICT boom that waned, while the United Kingdom had experienced a financial services
boom that ended with the crisis. Germany and France started from more moderate productivity-
growth rates and experienced smaller declines mostly related to capital intensity. Italy and Spain
started with zero productivity growth at the turn of the century and did not decline further.
ƒ We expect productivity growth to recover and see the potential for at least 2 percent growth a
year over the next ten years, with 60 percent coming from digital opportunities. However, while
crisis-related aftereffects are diminishing, long-term drags on demand for goods and services
may persist and hold back productivity from changing demographics, declining labor shares,
rising income inequality, polarization of labor markets, and declining investment rates. Digital may
amplify these demand leakages while potentially creating other barriers to productivity growth,
such as winner-take-most effects on industry structure. Capturing the productivity potential of
advanced economies will require a dual focus that promotes sustained demand growth and
digital diffusion.
Capturing the labor productivity We examine supply
France
and demand factors
potential of advanced economies
across seven countries Germany
and six sectors
PRODUCTIVITY GROWTH MATTERS FOR MATERIAL LIVING STANDARDS Italy
BUT HAS DROPPED TO HISTORIC LOWS
Spain
BROAD-BASED DECLINE CRITICAL ROLE OF INVESTMENT TOO FEW JUMPING SECTORS
Auto Finance Retail Sweden
>65% >50% <5%
United
of sectors with lower of the decline in many countries of sectors in the postcrisis Kingdom
productivity growth is from decreasing capital per period with accelerating
United
today than ten years ago hour worked growth; at its productivity growth compared
Technology Tourism Utilities States
lowest level post war with up to 50% a decade earlier
WHAT IS BEHIND EXCEPTIONALLY WEAK PRODUCTIVITY GROWTH? PERCENTAGE POINTS
Two waves dragged down productivity growth on average close to one percentage point each. A third wave IMPACT ON PRODUCTIVITY
GROWTH
contains the promise of significant productivity-boosting opportunities, but the benefits have not yet
materialized at scale. This is due to adoption barriers, lags, and transitions costs.
WAVE 1
THE WANING OF A MID-1990S
PRODUCTIVITY BOOM
WAVE 3
WAVE 2 DIGITIZATION
FINANCIAL CRISIS AFTEREFFECTS,
2.4 INCLUDING WEAK DEMAND AND
0.8 UNCERTAINTY
0.9 ?
0.5
AVERAGE AVERAGE PRODUCTIVITY GROWTH
PRODUCTIVITY 2010–14
GROWTH (including a -0.2% residual)
2000–04
P
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viii McKinsey Global Institute