Why is Productivity such a mystery?

Maybe we aren’t measuring the right things, or we’re not measuring things right. Or maybe we have the wrong ruler.

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Pick your measurements carefully

Neil Irwin digs into the mystery of productivity:

Productivity is one of the most important yet least understood areas of economics. Over long periods, it is the only pathway toward higher levels of prosperity; the reason an American worker makes much more today than a century ago is that each hour of labor produces much more in goods and services. Put bluntly, if the kind of productivity growth implied by the new data published Thursday were to persist indefinitely, your grandchildren would be no richer than you.

But it is also really hard to measure, particularly for service firms. (How productive were employees at Facebook, or your local bank, last quarter? Have fun trying to figure it out.)

And even with years of hindsight, economists are never quite sure why productivity rises or falls. During the 2008 recession, labor productivity soared. Was this because employers laid off their least productive workers first? Because everybody worked harder, fearful for their jobs? Or was it a measurement problem as government statistics-takers struggled to capture fast-moving changes in the economy? We don’t know for sure. (Here’s one analysis that emphasizes the first explanation.)

That is a long way of saying we don’t know for sure what is going on right now, or how long it will last. But the possible answers range from utterly depressing to downright optimistic.

I recommend reading Irwin’s analysis, but to summarize, he basically suggests three scenarios:

1) Depressing — Irwin doesn’t use the term ‘postnormal’ but he should have. In this scenario, we are in new territory where productivity is inherently lower than in the past, and will remain so.

He doesn’t say it, but the nature of the modern world, where everything has become deeply connected to everything else, may have incorporated a subtle friction into the economic engine. As a result, it may require greater investment to make any headway in productivity.

Also, as Irwin points out, new ideas are getting harder to find (see The Hidden Economics of Ideas) so the level of investment and time needed to find breakthroughs is steadily increasing.

2) Neutral — Perhaps we just don’t know how to measure ‘productivity’, anymore. Or said differently, the nature of work may have changed so much that the tools we use don’t measure all the outputs.

3) Optimistic — While companies may be making greater investments in some areas — like driverless cars — the impact and payoff from those investments is all in the future. Additionally, more effort may be directed toward changing the way we work, or the structure of delivering value to customers. Maybe this is an era of transformation, where only after a long hard slog will we finally see the rewards of efforts made in the present.

While we wait for more research results (or at least better economic theorizing) I’ll offer a hedge or two.

The first order impacts of the rise of computers and the internet figured in the productivity surge at the end of the last century, but productivity has slowed since the millennium. My bet is that the second order effects — which are much more significant — have come into play. The first wave was applying computing power to speed up what we were already doing. The second wave, where we are now, is when we are starting to do (have to do?) different things altogether.

What is the productivity impact of social media and social networks? They are transformative, and have impacted society at a foundational level, disrupting industries (consider media, entertainment, and telecommunications, as just the most obvious ones). Do they make the average worker more productive, though? Probably not, if you could even map the average worker’s daily routine against the daily routine of the ‘same’ worker in 1970. Which you can’t. Yes, it’s easier for an office worker to create a memo, today: there’s no typewriter involved. But instead of reading a few hard-to-produce-and-circulate memos each day, today’s office worker gets hundreds of emails, chat updates, and other messages everyday as a necessary part of getting their work done. Because the nature of work has changed shape, although people are still working 9 to 5, more or less.

The ruler used to measure our work has changed shape. We may want to make a direct comparison to 1970, but it’s never going to line up.

The waitron of today, juggling multiple jobs, communicating with ‘employers’ through workforce management apps on their smart phone can’t be easily compared to the full-time employee at 1970’s Howard Johnson who worked 11 to 8 Tuesday through Saturday and every other Sunday, and no smartphone. What part of the picture do you measure? Where’s the increase in productivity supposed to emerge? More plates of food per hour? Fewer hours at work? Holding salaries down to 1970 levels?

As usual, discussions about economics and work quickly come up against our postnormal, complex ethics. We have to decide how the ruler will be used, and not just its length.

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