Sam Fleming And Chris Giles

Why slowing productivity growth is acute problem worldwide

A worker using a die-cutting machine to cut out shapes of leather to be sewn into boots at the L.L. Bean manufacturing facility in Brunswick, Maine, US. -- PHOTO: BLOOMBERG 
A worker using a die-cutting machine to cut out shapes of leather to be sewn into boots at the L.L. Bean manufacturing facility in Brunswick, Maine, US. -- PHOTO: BLOOMBERG 

MR DREW Greenblatt surveys the shop floor of his small factory in a down-at-heel district of Baltimore, Maryland, where two workers are using a large steel-bending robot.

"This part used to be made in China," he says. "But because of the robotics, we stole this (manufacturing) from China and now make it in America."

The introduction of automation at Marlin Steel Wire Products has helped boost employee productivity fourfold since 1998, estimates Mr Greenblatt. The gains in efficiency are impressive but they are not being replicated across the United States.

Even as US manufacturers adopt automation as part of their fightback against offshoring to Asia, productivity growth across the economy is at a near-standstill.

A similar picture is being played out across the world, exposing the most pressing problem in the world economy today.

Only India and sub-Saharan Africa seem to be immune from slowing productivity growth.

Economists are increasingly alarmed because slower improvements in efficiency will lead to a fall in living standards and less solid public finances.

In the medium term, productivity growth is the most important driver of prosperity.

Its weakness in recent years lies at the heart of why advanced nations have remained in a low-growth rut since the financial crisis, even as unemployment has fallen.

Federal Reserve chief Janet Yellen raised the issue of America's "relatively weak" productivity in a speech last month and urged new measures to strengthen education, boost entrepreneurship and lift capital investment.

New data from The Conference Board think-tank show that average labour productivity growth in mature economies slowed to 0.6 per cent last year from 0.8 per cent in 2013, as a result of ebbing performances in the US, Japan and Europe.

Productivity, which tracks how efficiently inputs such as labour and capital are used, tends to evolve over long periods. But The Conference Board readings confirm a longer-term trend of sagging growth that is setting off alarm bells around the world.

"In the past decade, the US has had terrible productivity growth and other countries have been slipping relative to the US," says economist John Fernald of the San Francisco Federal Reserve Bank.

In Britain, productivity has not improved in eight years, breaking a trend of roughly 2 per cent annual growth stretching back over a century.

Faced with rapidly ageing populations and slowing employment growth, mature economies need to boost productivity sharply if they are to escape stagnating living standards.

To compensate fully for slower employment growth over the coming 50 years, productivity growth would need to be 80 per cent faster than over the past half-century, according to calculations from McKinsey consultancy.

Whether such an acceleration can be achieved depends in part on identifying why growth is slowing.

To optimists, the poor numbers are a transitory legacy of the recession. The downturn in global demand has temporarily depressed companies' willingness to invest in new equipment and ideas, and the more cautious outlook dented productivity.

But the slowdown predated the financial crisis. The Conference Board data reveals a longstanding fall in growth across mature economies. It started in the 1990s in Europe and Japan, and is related to slower adoption of technology, it says.

General Electric chief economist Marco Annunziata worries there is a structural problem in Europe due to a lack of risk-taking, low spending on research and development and inflexible labour markets.

In the US, productivity growth began to ebb in 2005. According to Mr Fernald, this was a result of the lapsing of temporary growth dividends from the 1990s revolution in information technology.

This raises the possibility that the recent dreary productivity growth in the US is actually a return to an older and weaker trend.

Even in emerging economies, where efficiency is catching up, the rate of growth has slowed.

This has major implications in terms of a prolonged shortfall in tax revenues and increased public debt. It was just such a scenario - the fall in productivity growth between 2010 and this year - that stretched a planned four-year period of austerity in Britain to a decade of public-sector misery.

Optimists counter that it is just a matter of time before we see an upsurge in productivity, pointing to innovation in American IT hubs such as Silicon Valley.

Researchers at Blue River Technology, a California-based agricultural robotics company, envisage farms of the future being surveyed by flocks of drones, and tended by fleets of robots and self-driving tractors.

It is already operating teams of "lettuce bots", which are being dragged across fields in Arizona and California to identify 1.5 million individual plants an hour and decide on how to fertilise them.

Some argue that the easiest targets for technological progress have already been met. But others say the world is on the cusp of a machine-driven growth spurt, where driverless cars and robots will replace people.

Another more bullish outlook suggests that the concept of productivity as a measure of living standards is now outdated because quality is difficult to measure in public services such as education, and progress is hard to capture in many consumer technologies. Equivalents of Skype, for instance, were prohibitively expensive a decade ago but now are free, giving people higher standards of living without troubling the statisticians compiling gross domestic product (GDP) data.

"This takes you into uncharted territory about what progress means in advanced economies," says Professor Diane Coyle of Manchester University.

"There has clearly been an increase in consumers' welfare, probably extremely large, and we don't know how it is linked to GDP."

Mismeasurement might explain how many consumers are better off without appearing to have higher incomes in real terms.

But statistical arguments cannot raise incomes or tax revenues, nor do they return sectors with previously high productivity growth back to former levels of success.

Without a return to the former productivity patterns in advanced economies, growth will be permanently lower, as will government revenues.

Austerity in the public sector will become a persistent feature and parents will no longer be able to expect their children to earn more than they did. Little is more important in the global economy.