Productivity Growth Broader Than Some Think
November 6, 2001
The consulting firm McKinsey & Co. recently issued a study of economy-wide productivity growth (output per hour of work) that found the increased productivity rate of recent years was due to just a handful of business sectors -- six of 59 economic sectors. If so, this would bode ill for future economic growth.
However, economist Gene Epstein says the productivity increases only appear concentrated because of the way McKinsey presents the figures.
According to McKinsey:
- Output per worker grew at a 2.3 percent annual rate from 1995-99, up from 1.0 percent for the period 1987 to 1995.
- The strong productivity gains of the late 1990s were concentrated in only 30 percent of the private sector and the "growth rate [of productivity] will probably not be as high as the 1995-2000 rate." But productivity will "continue to be...above the long-term, 1972-95 trend."
However, a recent study by economist Kevin J. Stiroh found that "a broad productivity resurgence took place after 1995, with all principal sectors and a majority of industries posting productivity gains."
In fact, the McKinsey study's own numbers end up supporting Stiroh:
- Over the post-'95 period in question, McKinsey found, 70 percent of the private sector showed an acceleration in output per worker of 1.8 percent per year.
- But at the same time, the other 30 percent of the economy decelerated its productivity growth by 0.5 percent per year.
- That positive 1.8 percent and negative 0.5 percent nets out to 1.3 percent.
McKinsey simply matched that 1.3 percent overall net productivity growth with the 30 percent of the private sector in which productivity grew 1.3 percent. Actually, productivity accelerated in 70 percent of the private sector.
Source: Gene Epstein, "Why the Whiz Kids Got It Wrong on Productivity," Economic Beat, Barron's, October 22, 2001; Kevin J. Stiroh, "Investing in Information Technology: Productivity Payoffs for U.S. Industries," Current Issues, June 2001, Federal Reserve Bank of New York.
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