How to capture the 2 percent or more productivity potential of advanced economies

How to capture the 2 percent or more productivity potential of advanced economies. In Solving the productivity puzzle. By Jaana Remes, James Manyika, Jacques Bughin, Jonathan Woetzel, Jan Mischke, and Mekala Krishnan. McKinsey Global Institute , February 2018. https://www.mckinsey.com/global-themes/meeting-societys-expectations/solving-the-productivity-puzzle

There is no guarantee that the productivity-growth potential we identify will be realized without taking action. While we expect financial crisis–related drags to dissipate, long-term drags may continue, such as slackening demand for goods and services due to changing demographics and rising income inequality and a rise in the share of low-productivity jobs; all of these factors may be further amplified by digitization. At the same time, the nature of digital technologies could fundamentally reshape industry structures and economics in a way that could create new obstacles to productivity growth.

Could long-term demand drags, amplified by digital, and potential industry-breaking effects of digital limit the productivity potential of advanced economies?

While we found that weak demand hurt productivity growth in the aftermath of the financial crisis, looking ahead, there is concern that some demand drags may be more structural than purely crisis-related. There are several “leakages” along the virtuous cycle of growth. Broad-based income growth has diverged from productivity growth, because declining labor share of income and rising inequality are eroding median wage growth, and the rapidly rising costs of housing and education exert a dampening effect on consumer purchasing power. It appears increasingly difficult to make up for weak consumer spending via higher investment, as that very investment is influenced first and foremost by demand for goods and services, and rising returns on investment discourage investment relative to earnings.
Demographic trends may further diminish investment needs through an aging population that has less need for residential and infrastructure investment. These demand drags are occurring while interest rates are hovering near the zero lower bound. All of this may hold back the pace at which capital per worker increases, impact company incentives to innovate, and thus impact productivity growth, slowing down the virtuous cycle of growth.
Digitization may further amplify those leakages, for example if automation compresses labor share of income and increase income inequality by hollowing out middle-class jobs, and may polarize the labor market into “superstars” versus the rest. Unless displaced labor can find new highly productive and high-wage occupations, workers may end up in low-wage jobs that create a drag on productivity growth. Our ability to create new jobs and skill workers will impact prospects for income, demand, and productivity growth.