Productivity mattersWe are nearing an age when drones will deliver packages to our door and cars will drive themselves. People started worrying about machines taking over office jobs when Google’s artificial intelligence program AlphaGo crushed world Go champion Lee Se-dol. We live amidst a flood of innovations changing our ways of life and economic activities.
Yet labor productivity data measuring output per working hour shows a much more stagnant picture. Productivity growth in the United States, which has slowed over the last decade, is most likely to fall this year for the first time in 30 years. Productivity growth has hovered at zero percent over the last three years in other major economies such as Britain, Japan and Germany. Korea’s growth, which outpaced that of other developed economies, has also been plateauing.
Economists give various interpretations for such a discrepancy between the changes in the tech world and decreasing productivity.
Northwestern University professor Robert Gordon believes that growth is over because inventions involving the Web and e-commerce are not as revolutionary as the discoveries of electricity and motor vehicles in the 19th century and early 2000s. Another possibility is that the slowed overall productivity largely originates with the increasing share of the services sector — which has lower labor productivity than the manufacturing sector — in economies.
Some analysts say that the expansion of the so-called global value chain, with a full range of activities and people involved in the production of goods or services around the world, has slowed ever since the global financial meltdown of 2007-2008. That expansion drove productivity in developed economies from 1990s until the mid-2000s. As enterprises rode the chain to expand globally, trade activities flourished through the production network. Since the global financial meltdown, however, companies used redundant work forces to increase production instead of investing anew.
Optimists argue that productivity actually has not slowed that much because the old measuring system doesn’t reflect the remarkable changes in online and mobile activities. The work behind free Internet services and efficacy from data profiling, for instance, is not counted in the gross domestic product. Services are also more difficult, they say, to measure in terms of productivity.
But a recent OECD report pointed out that the prolonged weakening in productivity in emerging economies as well as developed economies could suggest that fundamental factors — such as the increased contribution from the service sector — are behind the phenomenon.
Still, some believe we are at a tipping point before a major big bang in productivity from technology advances and innovations. Increasing use of artificial intelligence, customized medical services, and 3-D printing could be huge drivers of change. In 1987, MIT professor Robert Solow claimed, “You can see the computer age everywhere but in the productivity statistics” to suggest the discrepancy between computerization and productivity. After computers became commonplace in the 1990s and 2000s, Internet connectivity has saved costs and radically improved productivity through rationalization of marketing and inventory control.
When productivity stalls, so do incomes. Most Americans have seen their salaries unchanged or cut from 15 years ago if inflation is taken into account. The first-year salary for college graduates has actually decreased from 15 years ago. There should be comprehensive discussions and policy actions to address depressed growth in productivity and incomes. But the focus has shifted in a wrong direction. U.S. Republican presidential candidate Donald Trump wants to restrict immigration and toughen trade barriers instead of trying to find ways to improve economic efficiency. Such policies will most likely end up worsening productivity and economic growth.
With its demographic challenges of a rapidly aging population and an alarming surge in retirees, Korea will inevitably face a sharp weakening in productivity. The economy has mostly been driven by industries, and is lagging in new high-growth sectors.
The environment is also poor for encouraging innovation. We may have to be relieved that we do not have a radical extremist like Trump gaining influence. But there are concerns that public policy could turn anti-efficiency when the our presidential election campaign kicks off next year.
Translation by the Korea JoongAng Daily staff.
JoongAng Sunday, July 24, Page 19
*The author is the head of economic research at LG Economic Research Institute.