by Staff Writers, AdvisorAnalyst
Amidst the challenges that the United States is facing with rapid inflation, persistent labor shortages, and rising public debt, there is a glimmer of hope. According to the McKinsey Global Institute, a pathway out of this predicament is higher labor productivity.
This matters because if employers become more efficient in converting labor hours into goods and services, it would pave the way for a robust economic growth, even with the impending challenges due to a shortage of necessary workers in the coming decade.
By the numbers, McKinsey's recent research shows that if the U.S. returns to its 2.2% per year average productivity growth since 1948, as opposed to the subpar 1.4% rate from 2005 to 2019, it could add $10 trillion to cumulative economic output between now and 2030. This amounts to roughly $15,000 in additional output per household.
The research also found that there are high and low productivity companies within the same industry. As such, some of the productivity growth could come from the lower performers adopting best practices. For instance, in manufacturing, high-productivity companies achieve 5.4 times the economic output per hour of labor as the laggards. Furthermore, some U.S. regions, such as California, Colorado, Massachusetts, New York, North Dakota, Texas, and Washington, are experiencing strong productivity growth.
A productivity surge wouldn't be unprecedented, as a notable jump took place from 1995 to 2005, driven in large part by companies digitizing their supply chains and other information technology advances. This indicates that it's possible to improve productivity in the U.S.
Olivia White, a McKinsey senior partner and co-author of the report, emphasizes the importance of unlocking the power of investments companies have already made. "It's going to be hard, but we've done it before," White said. "Technology matters, but our real focus is not just investing in technology."
New projections from the Congressional Budget Office show that America faces significant challenges, with the national debt on track to soar from 98% to 118% of GDP over the coming decade. However, if the economy functions at a 2.2% productivity growth rate, the GDP denominator would be bigger, ultimately lowering the debt ratio.
In conclusion, improving labor productivity could be the key to solving the issues that the U.S. currently faces. Although there are challenges, as seen in the past, it's possible to achieve a surge in productivity. With the right investments and best practices, higher labor productivity can lead to a brighter economic future for all.
Source: Axios Macro, McKinsey Global Institute
