A global productivity slump?

Productivity across the world has been slowing for years. Are we just being inefficient or have we become lazier?

Author: Jules Gray
March 14, 2013

An alarming trend has started to harm developed countries that have fuelled the global economy for the last century. While highly productive workers formed the backbone of economic growth in countries like the US, Germany and the UK, as prosperity has filtered down throughout these societies, working efficiency has declined.

Worryingly, findings by The Conference Board, a global business research institute, show that productivity globally, and not just in developed countries, had declined by 1.8 percent in the last year, the largest drop since 2001. The measurement of output-per-worker showed that major emerging economies like China, India, Brazil and Mexico had seen their productivity slow, which, coupled with a reduction in investment, meant that total factor productivity growth had also slumped in these markets.

There has also been a long-term downturn. In a recent piece by the Wall Street Journal, it’s shown that over the last 10 years, the rate of growth in multifactor productivity has plunged across industrialised nations. Multifactor productivity takes into consideration both labour and the production and service capital. The US saw its annual multifactor productivity growth rate drop from 0.7 percent in the 1990s to 0.39 percent the following decade.

These declines in productivity could be seen as a consequence of developed societies hitting their comfort zones, with workers no longer having the desperate drive to work their ways out of poverty, as can often be seen in countries developing their economies, with huge potential for growth.

The signs that emerging economies are seeing a drop in productivity hint at deeper problems in the way in which work is carried out. A number of theories have been put forward for the decline in productivity across the world. Some feel it is the result of an innovation plateau that has come off the back of two decades of rapid technological advancements, leading to workers struggling to readjust to the different new ways in which work can be done.

Global problem
For the second successive year the world economy saw a decline in labour productivity, from 2.3 percent in 2011 and 3.6 percent in 2010. While this may well be as a result of a fall in capital investment, it also shows that workers are not being used efficiently. The findings by The Conference Board show that, although predominantly mature economies slowed down, emerging markets were struggling as well. While jobs had not grown at a rate many were happy with, the economic output in countries was the main contributing factor of the decline in productivity.

Google is one firm that heavily promotes its relaxed working environment, which it claims drives innovation

The report reads: “Just as in 2011, the global productivity slowdown in 2012 was to a much greater extent due to weaker output growth than to faster job growth. While the growth of the world’s GDP, adjusted for inflation, dropped from 3.8 percent in 2011 to 3.1 percent in 2012; average employment growth only slowed a little from 1.4 to 1.3 percent.

The last time the global economy saw labour productivity growth rates well below two percent was in 2001/02 and 2008/09, both times during which many economies were in recession. Before the mid-1990s global productivity growth rates were more frequently below two percent or even less than one percent, but in those times emerging markets were growing at much slower growth rates than during the past ten years.”

It is generally assumed that heavy investment in research and development helps to drive economic performance, while lower pay rates mean people work harder and more hours. However, Norway has confounded these beliefs by sustaining a high economic performance alongside relatively low innovation and high pay rates.

Interrupting the workflow
According to the Organisation for Economic Cooperation and Development (OECD), Norwegians work the third fewest hours in Europe, yet sustain a relatively high GDP, even when excluding their high levels of gas and oil. In fact, in terms of GDP per hour worked, Norway is the hardest working in the world. The OECD found that after Norway came Luxembourg, Ireland, the US and the Netherlands. France and Germany were seventh and eighth respectively, while the UK was down in 17th.

Measuring productivity through output per hour, instead of per worker, alongside low GDP growth, means that workers are not being as productive as they could be and there’s considerable wastage in the labour market.

This affects companies that have large operations in countries where the workforce isn’t pulling its weight, as they may begin to look at moving to regions where labour is both cheaper and more efficient.

Apple, for example, still maintains production operations in Germany, but that country’s productivity and wages are comparatively high. They have been encouraged to move much of their production back to the US, and are expected to build some personal computers in their homeland, which would seem to make more sense considering the US has a relatively high productivity output per hour worked. Where companies should divert their production and the bulk of their operations depends on both the productivity of the workforce and the cost of production. How people work differs between companies and cultures. Studies begun in the 1920s, popularly known as the Hawthorne Effect, show that workers respond positively and negatively to social situations and their treatment at work. Nowadays, providing flexible, relaxed working conditions could be argued to have helped increase productivity, whereas dull, repetitive factory work perhaps dampens morale and output. Google is one firm that heavily promotes its relaxed working environment, which it claims drives innovation. On the other hand, large manufacturing firms like Foxconn churn out vast quantities of tech products through their much-criticised factories populated with thousands of workers.

Faster communication
While technology has advanced and created far greater efficiencies in how we work, it is argued by some that the aftermath of such a change in working habits has caused a productivity slowdown. For example, email has clearly resulted in a faster means of communicating between companies and employees.

A recent study by US based analysts Apex Performance, entitled ‘Attention in the 21st Century’, showed that using email is beginning to slowdown workers productivity due to the high number of messages received daily, and the instinct to repeatedly check ones inbox. According to the study, 70 percent of respondents said they received more than 21 emails per day, with 50 percent saying they checked their email more than eleven times a day.

For the second successive year the world economy saw a decline in labour productivity, from 2.3 percent in 2011 and 3.6 percent in 2010

Dr Louis S Csoka, Apex’s president and founder, said: “That equates to opening your inbox once every 20 minutes. Prolonged focus on one thing at a time is required to efficiently accomplish a task. However, two-thirds of respondents are distracted at least every 20 minutes – and sometimes as little as 10 – by an email.” Improving productivity requires a change in mindset, says Dr Csoka: “No one has taught them how to stay focused, so they don’t realise what they are sacrificing. Employees need to learn how to get back on task and stay productive despite the inevitable bell, pop-up window or phone call.”

According to a survey conducted in 2007 by Microsoft internal research scientist Eric Horvitz, on average it took employees 15 minutes to get back to the work they were doing before replying to an email or phone call. Alongside the Apex research that would mean workers are only focusing on their tasks for just 15 minutes of every hour.

Horvitz said that his findings from within Microsoft were like representative of other companies, and should prove concerning to managers: “I was surprised by how easily people were distracted and how long it took them to get back to the task. If it’s this bad at Microsoft, it has to be bad at other companies, too.”

Technological advances
Multitasking is seen as an efficient way of getting work done quicker, but some researchers believe it restricts the effectiveness of what work is done, and could actually be slowing down productivity. David Meyer, a cognitive scientist at the Brain, Cognition and Action Laboratory at the University of Michigan, told the New York Times in 2007: “Multitasking is going to slow you down, increasing the chances of mistakes. Disruptions and interruptions are a bad deal from the standpoint of our ability to process information.” Research in 2007 by Jonathan Spira, Chief Analyst at Basex, says that interruptions during work could cost the US economy as much as $650bn a year.

The adoption of new technologies have both improved, and subsequently harmed, productivity, according to a study by the Federal Reserve Bank of Chicago. It says: “One widely cited explanation [for the slowdown] is that the increase in productivity growth that started mid-1990’s, as well as the decline in growth that followed, were both driven by the process of adoption of new information and communications technologies.” It adds: “As much of the accumulation of organisational capital is intangible and not measured as investment, measured productivity growth is initially lowered as resources are diverted to this unobserved investment. Later, measured productivity grows as firms benefit from the extra organisational capital. “As investments in ICT began in the early 1990s and peaked in about 2000, the lags in this process could explain the faster multifactor productivity growth between 1995 and 2004, and the slow growth thereafter.”

Interestingly, the blame for the slowdown in productivity, certainly in developed countries, is not placed on the recession that began in 2008. According to the Chicago Fed study, compared to the 1990s, from 2000 to 2006 productivity growth was lower in 18 countries and negative eight in others.

The note adds: “Is it possible that the current slowdown is a short-term aberration, and that as the advanced economies emerge from this period of economic crisis, faster productivity growth

will also re-emerge? If not, then it is tempting to revisit explanations that were proposed for the 1970s productivity slowdown.”

The Chicago Fed note concludes by asking whether the advances in productivity made by technological innovation ground to a halt, and so a readjustment is underway, or if there are underlying problems in developed societies.

It said: “Might it be due to the exhaustion of the gains from the information technology revolution? Or to declines in the quality of education and, hence, the quality of the labour force? Or even to declines in government investments
in infrastructure? Depending on the answer, slow measured productivity growth may be consistent with continued rising living standards or a period of stagnation in the developed world.”

Turning the tide
The problem of declining global productivity can be put down to a number of causes. While mature, developed nations might be seeing the effects of societies that no longer have the desperation to work their way into a better quality of life, emerging markets may still be held back by inefficient production and a lack of capital investment. On a company level, technological advances might have greatly aided the way in which employees work, but also added to the problems of time-management.

An obvious area in which decision-makers can focus is on improving the education of their workforces, resulting in a better quality of worker. Combine that with a more flexible working environment that both rewards and incentivises employees, and companies could start to see greater efficiencies emerge.