OM in the News: The Productivity Mystery

“The higher that U.S. productivity is, the better off Americans will be,” writes The Wall Street Journal (May 5, 2016). But despite constant advances in software, equipment and management practices to try to make America more efficient, economic output is merely moving in lock step with the number of hours people put in, rather than rising as it has throughout modern history. From 2011-2015, the labor productivity measure shows only 0.4% annual growth in output per hour of work. That’s the lowest for a 5-year span since 1977-1982, and far below the 2.3% average since the 1950s.

Productivity, our topic in Chapter 1, is one of the most important yet least understood areas of OM. Over long periods, the reason an American worker makes much more today than a century ago is that each hour of labor produces much more in goods and services. If current productivity rates persist, our grandchildren will be no richer than we are. Here are 3 possible scenarios:

(1) Sad Scenario: The productivity slowdown is real, and it’s not going away. Earlier waves of innovation in technology (a computer on every desk) and management strategies (outsourcing) have been fully put into place, and so are no longer increasing productivity.

(2) Neutral Scenario: There is measurement error in how we count. Entire industries are being transformed in ways hard to account for in data on GDP, particularly in technology and services.

(3) Happy Scenario: Businesses are adding workers in preparation for the future, but it will take time for their investments to pay off. For example, engineers are hard at work trying to perfect driverless cars. At present, they are a sap on productivity — they put in thousands of hours of work with no economic output to show for it. But if successful, they could radically increase productivity in the decades ahead.

Classroom discussion questions:

1. Describe the difference between single-factor and multi-factor productivity.
2. Provide a 2nd “happy” scenario.