How to revive US productivity - The McKinsey Podcast Recap

Podcast: The McKinsey Podcast

Published: 2023-05-18

Duration: 1440

Guests: Olivia White, Charles Atkins

What Happened

US labor productivity has seen a sluggish growth of 1.4% since 2005, significantly lower than the historical average of 2.2%. McKinsey partner Charles Atkins explains that productivity, the measure of output relative to input, is crucial for economic prosperity as it directly impacts national wealth and compensation levels.

Olivia White, a McKinsey senior partner, notes that while some states like New York, Massachusetts, and Texas show above-average productivity growth, others lag behind. This divergence is puzzling given the U.S. is a unified market expected to have widespread labor and idea mobility.

The McKinsey Global Institute report highlights that returning to historical productivity growth rates could add $10 trillion to U.S. GDP by 2030. This increase would translate to roughly $15,000 of additional output per household.

Certain sectors, such as information technology and finance, exhibit higher productivity, while sectors like construction and healthcare lag. Olivia White points out that even within sectors, there's a wide disparity in productivity among companies, with the most productive firms significantly outperforming the least.

Charles Atkins discusses Dot Foods, a success story in a lagging sector, attributing its productivity to early digitization and organizational restructuring. This example highlights the role of technology and skilled labor in productivity enhancement.

Olivia White advises companies to prepare for workforce challenges by investing in on-the-job training and supporting policies like childcare and eldercare. Digital transformation should align technology with business goals, requiring investment in both technology and organizational reconfiguration.

Internationally, the U.S. faces similar productivity challenges as European counterparts, though labor force participation is declining faster in the U.S. Solving productivity issues could also address labor participation rates by creating higher paying jobs and more professional opportunities.

The conversation concludes with the importance of the green transition, emphasizing the need for companies to plan capital allocation for green technologies and work collaboratively with local sectors to foster economic growth.

Key Insights

• US labor productivity has grown at 1.4% since 2005, which is significantly lower than its historical average of 2.2%. This slowdown correlates with a decrease in real compensation growth, which fell from 1.9% to 0.7% over similar periods.
• Some states, like New York and Massachusetts, exhibit higher productivity growth while others lag, creating a divergence not seen before. This is puzzling given the U.S. market's integrated nature, which should facilitate the spread of productive practices.
• Certain sectors, such as information technology and finance, show high productivity, while industries like construction and healthcare are lagging. Successful companies like Dot Foods attribute their productivity to early digitization and organizational restructuring.
• The U.S. faces similar productivity challenges as Europe, but with a declining labor force participation rate. Addressing productivity could help increase high-paying jobs and resolve some labor participation issues.