Preview the full findings of the McKinsey Global Institute's study here.
As the United States crawls out of recession, many commentators have wondered out loud whether the economy can ever get back on a path toward healthy growth. In the immediate term, there are concerns about when and from where the next wave of jobs will come. In the long term, some are questioning whether America's best economic days are now behind it. The Barack Obama administration caught the thread of that conversation early and tried to counter naysayers in the January State of the Union address. "The future is ours to win," Obama told the country, "But to get there, we can't just stand still." Specifically, what's required, the president explained earlier that month, is to "unlock the productivity" of the American people.
He may be on to something. In a report released today by McKinsey Global Institute (MGI), McKinsey & Company's business and economics research arm, we find real, tangible ways that the United States can retool its economy for the coming age of global growth -- and productivity is at the heart of this endeavor. In fact, the United States must increase its productivity growth rate by 30 percent or more to sustain historical economic growth rates in coming years. As the labor force ages and economic rivals crop up the world over, boosting the efficiency of every American worker will be vital to staying ahead in the global economic race.
Why is productivity key now? In short, because two other factors are working against the weak economy: Government and individuals are cutting back on spending in order to pay off debts, even as an aging population no longer gives the economy the natural demographic lift it once did. MGI finds that the United States needs to accelerate productivity growth to an average rate not seen since the 1960s if the economy is to return to the rates of GDP growth witnessed over the past 20 years and sustain the gains in living standards to which Americans have become accustomed.
Still skeptics abound on all sides. Some doubt whether productivity can really help return the United States back to economic health. Naysayers argue that the U.S. productivity engine is running out of steam anyway. Others yet worry that productivity is little more than business-speak for job cuts. They point to the period since 2000, during which sectors that saw the largest productivity gains -- computers, electronics, and manufacturing -- also lost jobs. Still others see China's pursuit of higher technology manufacturing as a sign of pending U.S. decline.
The numbers tell a different story, however. Since 1929, the United States has recorded simultaneous increases in both productivity and employment every ten-year rolling period except one, research from the MGI report finds. Even on a rolling annual basis, productivity and jobs have grown in tandem the majority of the time. In anything but the short term, it is a fallacy to suggest that there is a trade-off between productivity and jobs.
One reason is that productivity has two components: efficiency and innovation. Getting new, faster computers or organizing production to minimize waste are examples of the first; building better, higher quality products or creating new services are examples of the second. Both types of productivity gains can lead to higher employment when the savings are put to work elsewhere in the economy. In the 1990s, for example, the United States saw productivity growth from both efficiency and innovation, and unemployment hovered below 6 percent. This is a broad balance to which it now needs to return.
And productivity growth needs to accelerate. For half a century, increases in both labor supply and productivity contributed almost equally to robust GDP growth of 3.3 percent. Baby boomers and women streamed into the workforce. Now however, the boomers are retiring and female participation appears to have plateaued. Already, in the first decade of the 21st century, productivity gains have contributed 80 percent of total GDP growth compared with 35 percent in the 1970s. If the United States is to continue to enjoy the same levels of GDP growth experienced by previous generations, productivity will have to bear even more of the burden going forward. To compensate for the coming demographic changes, productivity growth will need to accelerate by 34 percent -- to a rate not that hasn't been seen since the 1960s.