Digital Technology May Give Productivity The Boost It Needs
In recent times, there have been plenty of questions about the state of our productivity in this digital age. It’s up. It’s down. It’s sideways.
Will technology give productivity the upward lift we’ve long been waiting for? Erik Brynjolfsson and Georgios Petropoulos, who have been studying the relationship between technology and productivity for decades, say yes, but be patient. “AI and other digital technologies have been surprisingly slow to improve economic growth. But that could be about to change,” they wrote in MIT Technology Review in 2021. “Technology alone is rarely enough to create significant benefits. Instead, technology investments must be combined with even larger investments in new business processes, skills, and other types of intangible capital before breakthroughs as diverse as the steam engine or computers ultimately boost productivity.”
Such breakthroughs now being experienced include AI and cloud computing, they state. This means being able to produce great business value from relatively cheap resources, such as cloud.
If such productivity gains were to materialize, the results would be astounding. “Regaining historical rates of productivity growth would add $10 trillion to US GDP—a boost needed to confront workforce shortages, debt, inflation, and the energy transition,” according to a recent report from McKinsey Global Institute.
It’s easier said than done, of course. “Since 2005, US labor productivity has grown at a lackluster 1.4 percent,” the McKinsey authors, led by Charles Atkins, report. “At the same time, real wages have slowed and workforce participation has declined.” US labor productivity is running well below its long-term average of 2.2 percent, they state.
There’s a good reason why productivity needs a boost at this juncture, they continue. “Looming challenges make productivity growth an imperative. Workforce shortages, debt, inflation, and the cost of the energy transition are powerful headwinds. All will be easier to confront with higher productivity.”
Achieving such gains will require “unlocking the power of existing technology, investing in intangibles, improving workforce reskilling and labor mobility, and implementing place-based approaches tuned to specific geographies,” the McKinsey team urges.
Technology gave productivity an impressive boost, but only temporarily, they note. “Recent technology advances, including in AI and biotechnology as well as productivity spikes since the global COVID-19 pandemic, raised hopes — albeit briefly — that perhaps another boost may lie ahead.”
Still, there is a link between productivity growth and digital adoption, the McKinsey report states. “Sectors with the highest and fastest-growing productivity have often been powered by a combination of advances in digital technology and an advantageous place in global industries.”
At the same time, “despite — and perhaps because of — their relative productivity success, the sectors with the highest and fastest-growing productivity supply a disproportionately small number of jobs,” accounting for two percent of new labor hours. The four leading sectors in this regard include mining, information, finance and insurance, and wholesale trade. “With the exception of mining, which has benefited from natural gas innovation, all are among the most digitized sectors in the US economy. Information, which includes businesses such as software, telecommunications, and internet publishing, has been a productivity superstar, averaging 5.5 percent growth since 2005, propelled by internet services and software.”
The leading firms in productivity “tend to be larger, more connected to global value chains, and focus on technology-intensive aspects of their sector. Research suggests these leading firms invest 2.6 times more in technology and other intangibles such as research and intellectual property, and attract and invest in more skilled talent.”
While technology has lifted productivity for some firms, “its benefits have not been fully captured nor broadly shared,” the authors advise. “A colossal opportunity awaits if the country can collect the benefits of today’s technologies and ensure that its dividends are spread economy-wide.”
“What’s to come is even more tantalizing,” they continue. “New so-called transversal technologies such as artificial intelligence and bioengineering are advancing by leaps and bounds. To unlock value from truly new technology, firms must reconfigure how they work, often over sustained periods, as they tinker with processes and workers adapt their skills.”
The McKinsey team also urge “complementary investment in intangibles such as talent, ecosystems, and organizational models. To be ready to capture value from digitization today and the new technologies of tomorrow, firms will need to build their capabilities with the right investments in skilled talent, operating practices, and platforms.”
Leading firms “commit to their digital strategy and devote sufficient resources to it as a core organizational priority. They mobilize the entire organization around their transformation, sharing responsibility and ownership of the transformation. They are flexible and agile, focusing on continuous development and making bold bets to reinvent themselves. And they invest in the right technology-ready talent to help execute these bets at both the frontline and managerial level.”
