A Big Four economist pinpoints 4 factors driving the productivity explosion

by NEW YORK DIGITAL NEWS



America is back to work. The productivity of U.S. workers grew 5.2% in the third quarter, according to the latest Bureau of Labor Statistics report, released Wednesday. That’s the fastest pace of growth since the third quarter of 2020. Productivity also grew last quarter, by 2.4%, making these the first two consecutive quarters of productivity growth in nearly three years. 

That’s a welcome turn of fate after five consecutive quarters of declining productivity, the reasons for which have been up for plenty of debate. The dispute has been raging for years now as executives and workers alike attempt to uncover what exactly leads to lowered output and morale. Many CEOs have pointed fingers at remote work, arguing that languishing on the couch has made it significantly easier for employees to extend less effort—which over time yanks total company production down. But the data hasn’t borne that out—offices have been no more full as productivity rose. And economists have mainly chalked the decline up to everything from sluggish economic activity to higher-than-usual job turnover.   

It may be too soon to tell if last quarter’s productivity surge is a flash in the pan—or what exactly is fueling the growth—but it still might be worth getting excited about. The productivity boom is very encouraging, according to Gregory Daco, chief economist at EY-Parthenon, the global strategy consulting segment of EY, a Big Four consultancy firm. 

“We’ve seen something that rarely occurs outside recessions: Productivity accelerated in a pro-cyclical manner, in line with the overall pace of economic activity, and positive growth in terms of the labor market,” he tells Fortune. 

Essentially, Daco adds, productivity has rebounded above its 2017-to-2019 norms, which he believes indicates that it’s “not just a quick bounceback,” but actually stronger than the prior trend—a positive development. 

It’s underpinned by four main factors unique to our current circumstances, Daco posits: Less turnover, more solid flexible arrangements, upped attention to costs, and more meticulous investing. Conspicuously missing from this list? A return to office, which Daco maintains has a negligible impact on productivity. (Future of work experts could have told you that all along.)  

Big Four

When the U.S. reported its fifth straight quarter of productivity declines back in May—the longest such stretch since World War II—it followed two years of the Great Resignation and job hopping. “When an employee that’s been there for a few months has to train someone who just joined—and that person may not necessarily stay for that long—that creates a massive productivity hit,” Daco says. “The person that’s been there for three months won’t be anywhere near as productive as the person there for multiple years.” Then the cycle repeats: Having them train someone else will mean the next person will be even less efficient.

But such worker churn has since fallen from its fever pitch—the quits rate has dropped back to its 2019 rate. “Employees are staying longer with their employers, and attrition rates are much lower,” Daco explains, adding that this makes employees better trained and more efficient.

Another thing that’s changed—adapting to hybrid work. Earlier this year, many workers were still navigating this workplace compromise. Now, most office workers log on remotely just shy of 30% of the time, and that figure hasn’t moved in many months. That hybrid work has become the norm means fewer organizational changes, which means more time to actually focus on the work. 

Being in a “post-pandemic shock environment” is why we had five consecutive quarters of contraction in productivity, Daco says. “Now we’re getting more settled, and people are finding balance in their flexible arrangements, and that’s driving more productive outputs.”

The other two factors are more external. Last year, inflation hit a 40-year-high. That left businesses paying extra attention to cost management, cutting back on expenses like free lunch and even resorting to rounds of layoffs. Now, the story in late 2023 into 2024 is one of cost fatigue, which Daco says is a bit of a departure from the inflation narrative that characterized the 2020s thus far. 

“Everyone is fatigued by the elevated costs of goods, services, labor, capital, interest rates, inventory—everything,” he says. “So bosses don’t want to let good talent go.” Instead, they’re having to find ways to improve productivity, such as investing in increased employee engagement and long-term retention and leveraging technological innovations like generative A.I.

And, in an environment where the cost of capital and interest rates are spiking, businesses scrutinize their decisions much more than they would otherwise in a strong economic climate. “You’re going to be much more careful with your investments,” Daco says. “That means that you’re going to focus on the investment decisions that bring the highest returns.” 

In other words: No unnecessary spending or innovation—focus on the most lucrative business levers, and divert all the resources and productivity to them. 

Office attendance and work output? Not so black and white

Bolstered by Daco’s four-point explanation, the new BLS data puts to rest the idea that where work happens is consequential in the productivity debate. Experts have maintained that exact point for years. 

Evidence of productivity differences between remote and in-person work isn’t black and white, Daco says; there’s a “huge diffusion” of gains and losses. “I don’t know if return-to-office policies have had much of an effect one way or another, because the arguments are clear both ways,” he adds. “It really depends on the culture and the reasoning behind the [policies].”

Often when someone is forced to do something, they tend to be less efficient, he says. Once people feel more comfortable and stable in an arrangement, their productivity tends to recover. 

Asked point blank whether a move towards greater in-person attendance may definitively improve productivity, Daco demurs. “I’m not answering the question, because there isn’t any clear-cut evidence that [this year’s Labor Day mandates] really shifted things that much.” 

By the time many of those Labor Day mandates were instated, they were already in place to some degree, and the half-and-half in-person split wasn’t entirely new. And, running counter to remote work expert Nick Bloom’s prediction that remote work will eventually edge out office work as the dominant format, Daco says he expects an increase in office work in coming years.

“We’ll never get back to—well, never say never—but we’re unlikely to get back to 100% office attendance,” he says. “But I wouldn’t be surprised if we still creep back up, especially if labor market conditions start to deteriorate and we see layoffs and more unemployment.” 

At that point, he says, the incentive will be greater for workers to be present instead of out of sight—which, they’d hope, would make their bosses hesitant to fire them first. Though of course, bosses could also take the approach of assessing workers on their productivity rates. Which, conveniently, are doing pretty well these days.

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