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Discussing Productivity at the OECD
European Straits #43
I’m sure many of you are familiar with Robert Solow’s famous quote on computers and productivity:
“What everyone feels to have been a technological revolution, a drastic change in our productive lives, has been accompanied everywhere, including Japan, by a slowing-down of productivity growth, not by a step up. You can see the computer age but in the productivity statistics.”
The idea has become something of a cliche, yet it is still very much present in the discussion on where exactly the global economy is headed.
For me, the latest example was seen this past Monday at the Château de la Muette in Paris, where I participated in a day-long meeting of the Expert Advisory Group for the OECD’s Going Digital project. Indeed productivity was on the agenda of this meeting. But as there was not much room to dig into it, I thought I would use this newsletter to elaborate on a few ideas and point out interesting sources:
Productivity is the result of combining ability with pressure. Technology is clearly an enabler: it makes it possible to gain in ability. A less familiar idea is that businesses need to be pushed into using technology with the appropriate amount of pressure. In many cases, business leaders seek productivity growth to cope with an increased level of competition on the market: hence the opportunities found in a sound antitrust policy. Additional pressure can be imposed by making the supply of resources such as labor more expensive. This is one reason why the combination of a higher minimum wage, stronger unions, and a wider safety net contributes to increasing productivity: all are incentives for business leaders to try and produce more with less workers.
One reason why more technology doesn’t translate into higher productivity is that the pressure on businesses to seek productivity gains has been weakened in the past decades. Neoliberal policies have made labor considerably cheaper, relieving employers of the burden of having to invest to increase productivity. Globalization has made it easier for businesses to operate across borders and access cheaper labor on offshore production sites. Technology itself has been working against productivity gains, as it facilitates the redeployment of business operations into global value chains and brings down the cost of production factors and other supplies. Why seek higher labor productivity if production gets ever cheaper?
Another reason why the new age of ubiquitous computing and networks is not bringing about higher productivity is that tech companies are still far from serving large markets. This is what I would call the James Bessen argument. In his remarkable book Learning by Doing, Bessen reminds us that productivity always slows down at the beginning of a technological revolution because entrepreneurs are experimenting with the new technology of the day and discovering the new markets that it contributes to opening up. Then those markets get larger, thus triggering a virtuous circle: higher demand leads to a higher level of investment, which increases labor productivity, then bringing down the price, and sustaining an even higher demand.
A key question is how much productivity we’ll be able to gain in what I call the proximity services industry—all the services that involve frequent and direct interactions between workers and customers. Historically, the related sectors (hospitality, retail, education, personal care, etc.) have resisted many efforts to increase labor productivity. As a result, some of those sectors have been taken over by the state, as in the case of education and health care. Others have become the exception in the prosperous Fordist economy: all those sectors, such as restaurants, personal care and retail, in which workers are so badly paid and work in such degraded conditions that joining them is considered a demotion to a lower social status.
Will the digital economy provide us with levers to finally make productivity gains in proximity services (which, incidentally, is where most of the jobs will be in the future)? There are still conflicting views on that matter. Some people, including myself, still think there’s room for productivity gains and that they will be brought about by improving scheduling, providing workers with better-designed tools, better allocating resources to account for the customers’ individual needs, and if necessary putting the customers themselves in charge of certain tasks. Others, including my wife Laetitia Vitaud and my esteemed Sciences Po colleague Bruno Palier, are exploring the idea of switching from being obsessed with productivity to being obsessed with quality and personal engagement, echoing the tradition of craftsmanship.
Here are a few articles to go further on productivity in the digital age:
On the economics of labor productivity: The Productivity Paradox (by Ryan Avent).
On the bright future of jobs: How Technology Creates Jobs for Less Educated Workers (by James Bessen).
On how rent-seeking harms productivity: Productivity Is Slowing and Inequality Is Growing. Here’s What’s Causing it (by Jason Furman).
On the underlying reasons for the productivity slow-down: Maybe We’ve Been Thinking About the Productivity Slump All Wrong (by Neil Irwin).
On how long it takes for technology to trigger productivity growth: Which Productivity Puzzle? (by William H. Janeway).
On the bright future of productivity: The Coming Productivity Boom (by Michael Mandel and Brent Swenson).
On why a higher minimum wage is a boon for productivity: Higher Minimum Wages Will Give High Tech a Boost (by Noah Smith).
On switching to new economic indicators: Is Productivity Growth Becoming Irrelevant? (by Adair Turner).
On craftsmanship as the new frontier: Why Taylorism Cannot Apply to the Cleaning Craft (by Laetitia Vitaud).
Warm regards (from London, UK),