The approaching productiveness increase

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The last 15 years have been tough times for many Americans, but there are now encouraging signs of a turnaround.

Productivity growth, a key driver for higher living standards, averaged only 1.3% since 2006, less than half the rate of the previous decade. But on June 3, the US Bureau of Labor Statistics reported that US labor productivity increased by 5.4% in the first quarter of 2021. What’s better, there’s reason to believe that this is not just a blip, but rather a harbinger of better times ahead: a productivity surge that will match or surpass the boom times of the 1990s.  

Annual Labor Productivity Growth, 2001 – 2021 Q1

For much of the past decade, productivity growth has been sluggish, but now there are signs it’s picking up. (Source: US Bureau of Labor Statistics)

Our optimism is grounded in our research which indicates that most OECD countries are just passing the lowest point in a productivity J-curve. Driven by advances in digital technologies, such as artificial intelligence, productivity growth is now headed up.

Technology alone is rarely enough to create significant benefits.

The productivity J-curve describes the historical pattern of initially slow productivity growth after a breakthrough technology is introduced, followed years later by a sharp takeoff. Our research and that of others has found that 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. For instance, after electricity was introduced to American factories, productivity was stagnant for more than two decades. It was only after managers reinvented their production lines using distributed machinery, a technique made possible by electricity, that productivity surged.

There are three reasons that this time around the productivity J-curve will be bigger and faster than in the past.

The first is technological: the past decade has delivered an astonishing cluster of technology breakthroughs. The most important ones are in AI: the development of machine learning algorithms combined with large decline in prices for data storage and improvements in computing power has allowed firms to address challenges from vision and speech to prediction and diagnosis. The fast-growing cloud computing market has made these innovations accessible to smaller firms.