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What Happened To American Productivity?

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American productivity is in the toilet – maybe. We’re in the middle of the “longest slide in worker productivity since the late 1970s,” according to recent data released by the Labor Department. America is part of global trend in productivity declines, joining countries including Britain and Norway in the losers’ bracket.

This is a troubling trend because it means companies are – potentially – facing a revenue squeeze. While we’re still near the top of the corporate profit boom – corporate earnings accounted for 8.5 percent of total GDP in the first quarter – the economy remains on delicate legs.

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Increasing productivity typically comes from either an increase in skill or an increase in technology – both of these lead to increased efficiency, which is related to productivity. The problem for businesses and the economy at large is that we’ve increased the power and availability of technology exponentially, but productivity growth has lagged.

This – along with plenty of other factors – means companies are unlikely to pay employees more, as wages are likely to continue stagnating.

Luckily, all is not lost. Small businesses can have an impact on productivity in their own offices and across the entire country. Today, we’ll look at what’s happening in the economy, why productivity is slowing, and what you can do about it.

American productivity: a brief introduction

In economics, productivity is more than just a measure of the things you make and how long it takes. Instead, it’s a measure of how much value you get out of your economy relative to the inputs that economy chews up. Basically, you take GDP (gross domestic product) and then compare it to the number of hours worked.

In the Bureau of Labor Statistics’ (BLS) second quarter productivity release, it recorded a dip in productivity. Output increased by 1.2 percent, but input increased by 1.8 percent. As a result, we ended up generating less with more. It’s like watching the mileage of your 1993 Ford Fiesta slowly decline as wear and tear rot its efficiency away.

This is not a universal problem, according to the BLS. For instance, in the second quarter this year, durable goods manufacturing productivity actually increased by 2.6 percent.

So, if we have two moving parts – hours worked and resulting GDP – we have two suspects for the cause of our productivity slowdown.

Slowdowns in productivity

Some observers have taken issue with the measurements. A common culprit is mismeasurement of the tech industry, which tends to produce lagging gains in productivity. This was on display in the late 1990s when productivity briefly jumped, as businesses implemented new communications and IT systems that had been in development years earlier.

Up to that point, economists had bemoaned the drop in productivity that had taken place after the 1960s. Then, suddenly, everyone trusted the productive value of technology and looked forward to a rebirth of sustained growth as the IT market matured.

There are concerns with the GDP side of the equation, as well. Measures of productivity have some adjustments built in to try and account for value increases that aren’t reflected in price. The ‘value’ of your cell phone has drastically increased in the last three years, for instance, but its price may not have.

We can quibble with the measurement – we should quibble with the measurement – but we shouldn’t let that deter us from figuring out if something is actually, fundamentally wrong with our production.

One underlying issue may be flat consumer spending. From 2009 to 2001, consumer spending hit a trough, running below $75 per day. Before the crash, daily spending had been closer to $100. We’re working our way back to that level, but average daily spending is still hovering around $90.

That means that companies are pulling in fewer dollars, which means they’re less likely to have the free cash to invest in bettering their businesses, through new technology purchases or investment in training.

Tech fails to fill the productivity gap

Instead of focusing on efficiency, it seems many companies have been investing in their product sets. Research and development in the US has risen over the last two decades, now equal to 2.8 percent of GDP. In 1996, R&D was just 2.44 percent of GDP, according to data from the World Bank.

While not all R&D pushes on the value side of the equation, much of the research being done is in search of the next big thing.

The rest may fall into the void of technology improvements designed to spur increases in productivity – like those driving growth in the 90s – that have a delayed effect on the economy. Venture capitalist Marc Andreesen thinks that’s part of the productivity problem, though economist Tyler Cowen disagrees.

“The tech economy just isn’t big enough to account for the productivity gap. That gap has caused measured G.D.P. to be about 15 percent lower than it would have been otherwise, yet digital technology industries were only about 7.7 percent of G.D.P. in 2004. Even if the free component of the Internet has become more important since 2004, it’s hard to imagine that it is so much better now that it accounts for such a big proportion of G.D.P.”

Here, Cowen is referencing the belief that free services like Facebook and Google have been overlooked in the numbers. That the value they generate is somehow missed by traditional surveying and that the oversight accounts for the weakness in productivity growth. In short, the tech industry just isn’t big enough for that to be the case.

Productivity at the small business level

What the hell does this all mean for small businesses? When things like productivity are hurting, there is a huge set of underlying problems that the average business owner has next to no control over.

American infrastructure is a good place to start, with decrepit roads and bridges hampering efficiency increases in the logistics sector. Small businesses can’t really fix that one. Nor can they fix the ups and downs of the market, which have affected investment by large corporations and which can keep smaller contractors from getting good work. Can’t fix that.

While it can feel like American small businesses are just along for the ride, there are actually some very concrete steps owners and managers can take to increase local productivity.

What you can do to make the world a more productive place

First, companies can focus in on spending the resources they have available to them in the most efficient manner possible. This may seem like common sense, but the uncommon bit comes in the realization that there are more resources available than you may think.

Goldman Sachs has suggested that increased access to capital for small businesses can lead to solid productivity gains. It makes sense that in order to leverage your output, you would leverage your resources through borrowing or investment.

While getting access to properly priced capital can be a challenge, now is a good time to make the effort. Banks are still interested in lending to qualified – which is to say, established and profitable – companies. Interest rates remain low and investment in technology and software can have a massive impact on output.

Second, small businesses can encourage other small businesses through management, investment, or simply by networking. A dynamic small business market introduces new ideas into the system and “can heighten competition and underpin productivity growth,” according to the OECD (Organisation for Economic Co-operation and Development).

Spending time with an up-and-coming entrepreneur can help them avoid common pitfalls and gain access to the right contacts. By helping them succeed, you force their competition to adapt faster and produce more efficiently.

This benefits your business by generating a new contact and, potentially, a new client. If you run an established app design business, you can help a digital design firm get off the ground by working them into your network. The firm then becomes a potential client and a productive member of the local small business community.

Finally, you can embrace growth. This is another one that seems like common sense, but often business shy away from a level of growth that will run them into increased regulation and oversight. While some companies may worry about declines in productivity as they grow, many types of businesses can achieve productivity gains through growth.

Larger organizations also gain additional influence in the local business and government spheres, which can help open new doors or break down some of those regulatory hurdles, allowing you to open new doors to productivity.

One more thought

Finally, finally – this is a software site, after all – you can find ways to make your business run more smoothly and efficiently with software. Save time on accounting, payroll, expense management, project management, and much, much more.

That boom from the late 90s may have passed for the country, but if your company moves from outdated technology to the best stuff available today, you could see a massive boost of your own.

If you’ve seen any clever ways to support increased productivity at the small business level, let me know in the comments. I’d love to hear about it.

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About the Author

Andrew Marder

Andrew Marder is a writer for Capterra. His background is in retail management, banking, and financial writing. When he’s not working, Andrew enjoys spending time with his son and playing board games of all stripes.

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Good post.

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