Why Productivity Growth Is Important To You?

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The chairwoman of the Federal Reserve, Janet Yellen, testified on Thursday before the Senate Banking Committee to address their questions and concerns. One key questions which I paid special attention to was in regards to the 3% growth in the next few years. Her response was by expressing the difficulty of the possibility of the 3% growth. One reason she expressed this difficulty was because of the lack of productivity growth in the United States.

This article is going to aim to explain what productivity growth is, and how it can increase.

Economic Activity:

Economic activity can be measured by tracking these three main driving forces:

  1. Productivity Growth
  2. Long-Term Debt Cycle (~ 50-75yrs)
  3. Short-Term Debt Cycle (~ 5-7yrs)

NOTE: When one overlays these three forces on top of each other, you can derive a template to track economic and market movements. This works for all countries in the planet, not just the United States.

Productivity Growth is the most difficult of the three forces to increase, and the Federal Reserve can’t control it. This is because it includes an increase in people’s knowledge over time which increases living standards. One can make the case that Productivity Growth increases naturally because people’s skills increase as time goes by, however in the short term, real economic activity can decline tremendously if there is stagnant growth and a stagnant economy buzz.

Productivity Misconception:

When it comes to Productivity Growth, even commonly agreed indicators of what is good for an economy have not been properly analyzed and correlated with results. For example, if a country has a more educated population, most would believe that it’s more productive than having a less educated population, so naturally people believe that to increase Productivity Growth you simply need to educate people. The indicators of cost-effectiveness of education are lacking and correlations with subsequent growth don’t exist, so in other words if politicians simply push to educate people without considering the costs and paybacks of that education, the country’s resources will diminish and result in a less productive economy.

Growth Domestic Product  (GDP = # of Workers * Productivity):

A country’s GDP (production) will equal the number of workers times the output of the worker. You can increase productivity by working harder or working smarter. Productivity is driven by how cost-effectively one can produce, so competitiveness will have a big effect on the growth.  Competitiveness is driven by what you get vs. what you pay to produce it. And a country is just the combined sum of the people and the companies which make them up.

Culture:

According to Ray Dalio: Culture is one of the biggest drivers of productivity. It’s intuitive that what a country’s people value and how they operate together matters for a country’s competitive position. Culture influences the decisions people make about factors such as savings rates or how many hours they work each week. Culture can also help explain why a country can appear to have the right ingredients for growth but consistently underperform, or vice versa. For example, in Russia,  the culture that affects lifestyles (i.e., alcoholism, the low drive to succeed, etc.) causes it to substantially under-live its potential, while in Singapore, where high income levels make their labor relatively uncompetitive, their lifestyles and values (i.e., around working, saving and investing) allow them to realize a higher percentage of their potential.

While lots of elements of culture can matter, the ones that Dalio finds matter the most are:

  1. The extent to which individuals enjoy the rewards and suffer the penalties of their productivity (i.e., the degrees of their self-sufficiency)
  2. How much the people value savoring life versus achieving
  3. The extent to which innovation and commercialism are valued
  4. The degree of bureaucracy
  5. The extent of corruption
  6. The extent to which there is rule of law

Basically, countries that have people who earn their keep, strive to achieve and innovate, and facilitate an efficient market-based economy will grow faster than countries which prioritize savoring life, undermine market forces through highly redistributive systems, and have inefficient institutions.

Economic Principles

Skills Gap:

One way to increase productivity growth is by focusing your education on the job skills gap. The Job Openings and Labor Turnover Survey (JOLTS) provides a monthly update by the Bureau of Labor Statistics and tracks the number of job openings. As of May 2017, there are 5,666,000 job openings.

Conclusion:

To increase productivity, a country needs to increase the education of its workforce by focusing on the skills needed today in order to do the jobs which are available. Some of the biggest gaps in the United States is STEM related fields as well as medical and pharmaceutical manufacturing. Also, there is a large need to find technicians with the electrical and mechanical skills needed to operate and maintain the complex machines.

Survey - Skills Gap WideningA 2015 survey by Deloitte and the Manufacturing Institute found that it takes an average of 94 days to recruit for highly-skilled roles in Science and Engineering, and 70 days for skilled production workers.

 

 

 


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Special Thanks To:

  1.  http://www.economicprinciples.org/wp-content/uploads/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf
  2. https://fredblog.stlouisfed.org/2016/08/measure-for-measure-judging-the-economy/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog
  3. http://www.cnbc.com/2017/07/13/janet-yellen-3-percent-gdp-growth-in-the-next-2-years-would-be-difficult.html

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