In The Long Run
Paul Krugman | Productivity Surge | Factoids
The Quote of the Moment
Productivity is not everything, but in the long run it’s almost everything.
| Paul Krugman
Productivity Surge
There has been a surge in productivity in the US economy. The question is, why?
One thing is sure: it’s not the consequence of a Return to Office movement.
As Nick Bloom spelled out on X:
New paper studying the impact of 137 Return to Office mandates on S&P500 firms from 2020-2023. Three key results:
1) RTO mandates are more likely in firms with poor recent stock performance, and in those with powerful male CEOs.
2) Glassdoor data finds RTO mandates significantly reduce employee ratings for job satisfaction, work-life balance and senior management.
3) There is no significant impact of RTO mandates on either firm profitability or firm stock-returns.
My interpretation is that RTO mandates are often a response to poor recent company performance, perhaps adopted by under-pressure CEOs. These RTO mandates upset employees, but do not appear to yield performance benefits in return.
You have to connect the dots: reduced work satisfaction decreases engagement and leads to departures, which decreases productivity. So we have to look elsewhere.
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Jeanna Smialek asks a bunch of questions about this productivity surge, noting that it’s been thirty years since seen numbers like this, so maybe what’s happening now is like the 1990’s:
In the 1990s, the World Wide Web was coming into widespread use. Companies initially fretted that it might sidetrack their workers. (“Oh, what a tangled web, this Internet,” a 1995 article in The New York Times sighed about online distractions.) But the tools ultimately streamlined many types of work.
One retrospective on the 1990s boom found that a combination of efficient computer manufacturing and increased information technology use accounted for about two-thirds of the era’s productivity pickup.
Today, we fret about doomscrolling and TikTok liquefying our minds, so we still experience the ‘fear of the internet’, just in a different form.
But the second point she makes — ‘efficient computer manufacturing and increased information technology use’ — translated to, in particular, the rise of email and its impact on large organizations that responded by reengineering their workforces, flattening layers of the org chart, and squeezing out bureaucracy, trimming secretarial pools, and outsourcing work overseas.
There’s a great deal of supporting evidence that this may be the case, here in 2024, at least as a factor.
For years, many have argued that distributed teams involved in scientific research were less productive than those colocated. In a recent paper, Disrupting Science, Chinchih Chen, Carl Benedikt Frey, and Giorgio Presidente state [emphasis mine]:
In this paper, we explore how the rise of remote collaboration has shaped the pursuit of new ideas in scientific discovery. To systematically distinguish between disruptive breakthroughs and incremental discoveries, we use citations data for over ten million research teams—publishing in eleven fields of research from 1961 to 2020. On average, we document a robust and significant negative impact of remote collaboration on breakthrough discovery. However, beginning in the 2010s, the negative impact tapers off and even becomes positive. We provide evidence suggesting that the reversal is driven by improvements in key technologies needed for effective remote collaboration.
However, it is still true that researchers benefit by moving to higher-ranked institutions, presumably bc of low-friction interactions with other top researchers, perhaps outside the same fields.
We interpret the finding as suggesting that the distributed team is more likely to benefit from local knowledge spillovers, presumably due to fewer communication frictions within the team. This implies that local knowledge networks and digital networks are complements rather than substitutes. Indeed, by connecting local knowledge networks, remote collaboration increases the size of what Muthukrishna & Henrich (2016) have called the “collective brain”.
So the world’s collective brains have gotten bigger and faster.
Note that scientific research is the key driver of economic advance.
But there’s another, more prosaic factor at play. The strange combination of high borrowing costs, high inflation, and low unemployment has forced companies to invest in productivity.
In Productivity continues to rise in potential game changer for economy, Joseph Brusuelas and Tuan Nguyen write
The increase in American productivity over the past year, if sustained, is a potential game changer for the economy that represents that mythical rising tide that lifts the living standards of all.
[…]
The 3.2 % increase in productivity during the final quarter of the year and 2.7% on a year-ago basis has most likely been a catalyst for both robust economic growth and disinflation over the past year.
[…]
Investment spending on structures grew at a torrid pace of 8% in each quarter on average over the past six months, while spending on intellectual property and equipment grew by 5.5% and 2.8% on average, respectively.
They identify some factors:
Rising wages: An increase in labor through better pay that attracted disaffected workers back into the labor force.
Full employment: Workers can now acquire better jobs and receive training which increases output per hour.
Manufacturing revival: The CHIPS and Science Act, the bipartisan infrastructure act, and the Inflation Reduction Act have all led to a surge in manufacturing capacity.
Immigration: Legal immigration has helped increase the supply of labor amid a chronic shortage of workers.
And the clincher:
It is no mystery that during a time of high inflation, high borrowing costs and persistent labor challenges, businesses were forced to become more efficient by making productivity-enhancing investments.
Smialek quotes Allen Greenspan who was head of the Federal Reserve in the mid-90’s:
The 1990s and the 2020s have another possible productivity booster in common: slipping pricing power.
Inflation had been cooling for years by the mid-1990s, and Fed officials noted at their meetings that companies were losing their ability to continue to raise prices without losing customers. To keep profits from collapsing, firms had to figure out how to be more efficient.
“Of necessity we will tend to get an increase in productivity because it is being forced on the system,” Alan Greenspan, then the Fed chair, theorized during one Fed meeting.
Inflation is also coming down today. And the job market was strong back then and is now — meaning companies have had to pay up to attract workers. When wages are rising faster than prices, firms must stretch their workers further if they hope to maintain their profits.
But Smialek misses the point that Brusuelas and Nguyen made: the companies made investments in structural improvements — new machinery, more upskilling, larger facilities — not just ‘stretching’ their workers.
Like some of those Smialek spoke with, these researchers don't know what the impact of AI is, yet. That’s for the future, it seems.
Factoids
Some 8.3% of workers don’t brush their teeth when working from home. Perhaps more alarmingly, 5.1% don’t brush their teeth even when going into an office. | WFH Research
Hmmm. The 5.1% is an argument for not going in for the 94.9%.
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Insurers’ losses from natural disasters topped $100 billion for the fourth year in 2023. | Emily Flitter
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One does not need to look hard beyond traditional metrics to see the prevalence of insecurity. In June, an industry report found that auto loan delinquencies were higher than they were at the peak of the Great Recession. Credit card use has swelled, and delinquencies are at among their highest rates in a decade. After hitting a historic low in 2021 thanks to the expansion of the child tax credit, child poverty more than doubled in 2022 after the tax credit’s expansion expired. Also in 2022, rates of food insecurity reached their highest levels since 2015. | Americans Believe the Economy Is Rigged Against Them
And Americans aren’t wrong.
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San Francisco City Attorney David Chiu announced today that he has reached a groundbreaking agreement with Qwick that requires the company to convert all of its misclassified California workers to employees, ensuring they are eligible for the full range of employee benefits and protections. In 2023, Chiu sued Qwick, a gig economy company that provides on-demand staffing to the hospitality industry, for depriving workers of critical employment protections by misclassifying them as independent contractors instead of employees. | City Attorney of San Francisco
This may be the faster and most direct way to force the reclassification of gig workers to get them the pay and benefits they should have. Note: the externalization of those expenses by corporations means that everyone else has to pay for the safety net they want to cut.