Productivity growth is crucial to increase wages and living standards, and helps raise the purchasing power of consumers to grow demand for goods and services. Therefore, slowing labor productivity growth heightens concerns at a time when aging economies depend on productivity gains to drive economic growth.
New McKinsey research uncovers how three waves collided to create historically low productivity growth but finds the potential for it to recover to two percent or more. Productivity growth is crucial to increase wages and living standards, and it helps raise the purchasing power of consumers to grow demand for goods and services. In this report, McKinsey sheds light on the recent slowdown in labor-productivity growth in the United States and Western Europe and outline prospects for future growth.
While there are many schools of thought, McKinsey finds three waves collided to produce a productivity-weak but job-rich recovery, with productivity growth falling on average to 0.5 percent in the 2010–14 period compared to 2.4 percent a decade earlier.
These three waves are: the waning of a productivity boom that began in the 1990s, financial crisis aftereffects including persistent weak demand and uncertainty, and digitization. The third wave, digitization, is fundamentally different from the first two because it contains the promise of significant productivity-boosting opportunities, yet the benefits have not materialized at scale. This is due to adoption barriers, lags, and transition costs such as the cannibalization of incumbent revenues.
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