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.

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.