Where's the Productivity?

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In early September, second quarter productivity growth estimates were revised - from -0.5% to -0.6%. Productivity change was even worse in the United States than we had thought. And this made for three straight quarters of contraction, the first such trend since the 1970s.

What gives?

There is no shortage of opinion in the marketplace. High corporate taxes are a favorite target, with the assumption that with lower rates companies would repatriate cash stockpiles squirreled away overseas and invest them. Confusingly in this hard-fought election year, another target is immigration: in principle, the argument goes, adding more immigrants at the lower end of the economic scale would increase output at a lower cost. And of course regulatory requirements remain a bete noire of many observers, who see money spent on compliance as being removed from more productive purposes.

Still another intriguing possibility is the aging of the population: as more older workers retire, there is less getting done. Appealing as this is, top-line productivity tends to be based on labor productivity, which is simply the output compared to the hours worked...and less workers means a lower denominator.

However, there is a stronger argument around the reduction in highly-expert workers. We know that the flow of college graduates is slowing - college enrollment peaked in 2010 and has been sliding backward ever since. Combine the retirement of highly-experienced professionals with the reduction of highly-educated replacement workers, and there is a skills gap that could very easily drive productivity reductions.

Those new professionals exiting college are, into the bargain, less inclined toward career stability:while job tenure is generally shortening for everyone, it is most pronounced among younger workers. Our theory about the thinning of experienced workers is also strengthened by US Census data that shows tenures tend to get longer as workers get older: the people with the institutional knowledge are retiring, and being replaced by individuals who likely won’t be around long enough to acquire it.

Meanwhile, having examined the top and the bottom of the age distribution, what’s happening in the middle? Those same US Census numbers suggest tenure is headed in the same direction: straight down.

Here’s a theory as to what’s going on: as businesses become increasingly project-focused, they are losing the macro benefits of building a continuously-improving, engaged workforce. The lure of the ‘shiny penny’ employee, who has a wildly specialized set of ‘new’ skills draws more attention than helping an existing colleague to add a couple new tools to their already-impressive toolbox. As the shiny penny rolls in, the would-be longtime colleague heads off to an organization where they themselves are the flavor of the week.

And guess what? Six months later, the luster has worn off the shiny penny and we’re right back where we started.

It’s tempting to wonder whether that’s a good thing: get the exact right person, get the job done, switch them out, no muss no fuss. But the economic indicators - even beyond stagnating national productivity - suggest this isn’t working out so well.Yale’s Richard Foster found that S&P 500 companies, which had a ‘life expectancy’ of 67 in the 1920’s, now are dead and gone within 15. Short-term thinking about workforce development isn’t just leading to shorter tenures, it’s leading to shorter total lifecycles for businesses.

So let’s put together what we know. Older employees are retiring; the volume of college-educated replacements is shrinking; employees in all age cohorts are remaining for shorter periods in their posts; productivity is down; and companies are going out of business more quickly. Perhaps all the connections we’re drawing here aren’t right - but if they are, the beautiful corollary to this rather unfortunate picture is that there is an obvious solution: focus more on keeping, developing, and sharing in the success of a longer-term workforce. Build your own experts, and help them to transition to all the new challenges by topping up their capabilities, rather than grabbing the shiniest penny that becomes available.

Higher internal expertise, and longer tenure of more engaged employees, sounds like a pretty solid strategy to combat downward pressure on productivity.