U.S. businesses are in a productivity slump. Nonfarm business sector labor productivity fell quarterly and yearly in the first quarter of 2023, with the increase in hours worked surpassing growth in output.
The nation’s problems with worker productivity have been longstanding, as the last real boost occurred in the 1990s. But productivity has been a focus as of late because CFOs and other members of the C-suite have been forced to deal with rising workers’ wages eating into profit margins.
Labor trends during and after the pandemic, like the increase in workers quitting and switching jobs, also directly affected productivity because, at some companies, they whittled down the ranks of experienced, efficient employees.
Plenty of other things may have contributed to a post-pandemic lull in output per hours worked. In a Bloomberg opinion piece recently, economist Tyler Cowen wrote, “Workers have been undergoing a serious crisis of morale since the pandemic — and they really are doing less.”
Remote work policies (in the U.S., 34% of employed persons did some or all of their work at home on days they worked in 2022), have also been blamed. A study released in May by New York Fed researchers found that at an unnamed corporate call center, the productivity of formerly onsite call operators dropped 4% when they were forced to work from home. Remote work also reduced the quantity and quality of customer calls.
Productivity is sensitive to shifts in activity between high- and low-productivity sectors, which largely explains the trends post-pandemic. — BofA Global Research
The aging of the U.S. workforce has also been cited, as has employees' lack of access to the necessary tools for streamlining processes and workflows (according to the employees).
Economists say part of the reason for the recent drop in productivity numbers is the rebound in services sector jobs. “Productivity is sensitive to shifts in activity between high- and low-productivity sectors, which largely explains the trends post-pandemic,” according to a June 12 note by economists at BofA Securities.
Applying Automation
Companies may face demographic headwinds to productivity in the coming years, but significant upturns in productivity can usually be driven by technological innovations. “Upward pressure on wages has led to higher spending on automation,” according to BofA Securities economists. It’s not surprising that some experts are saying the next economy-wide productivity boost could come from artificial intelligence and generative AI tools like ChatGPT.
A National Bureau of Economic Research paper found that generative AI in a call center setting improved some workers’ productivity by 14% by “capturing and conveying some of the tacit organizational knowledge about how to solve problems and please customers that previously were learned only via on-the-job experience.” But boosts from applying generative AI may not be immediate.
If there's a new wave of investment in automation, labor-intensive service industries like restaurants and health care may be the biggest beneficiaries.
With wages a higher percentage of Starbucks’ revenue, the coffee chain is focused on automating lower-value tasks. According to BofA Securities, a new store system rolling out this year includes new ice and milk dispensers, improved blenders, and a “behind-the-counter layout aimed at simplifying the steps needed for baristas to fill orders.”
Chipotle is also investing in labor-saving tech. A new robotic arm, “Chippy,” will take over the process of frying chips if current tests in live stores go well.
And retailer Kroger has partnered with Google Cloud and Deloitte on two “purpose-built” applications, including a task management app for night crew managers that provides information about the volume and type of merchandise and a store management system that provides a customizable walk path to guide managers when conducting store audits.
Installing new technology won’t by itself lead to large productivity gains in these or any other industries, according to Erik Brynjolfsson, a senior fellow at Stanford University.
“The bigger part is that while technology by itself leads to some productivity gains, to get a lot of productivity, you need to rescale the workforce, and you need to transform your businesses,” Brynjolfsson said in a McKinsey Global Institute roundtable in late May. “That transformation process can, unfortunately, take decades. I’m optimistic that it’s going to happen a lot faster in the coming year.”