By Selina Stoller, Summit Consumer Receivables Acquisitions, LLC
Two important facts about the economy over the last decade are clear: A giant global financial crisis led to mass unemployment in many countries, and the world experienced years of disappointing economic growth despite numerous technological innovations.
According to Forbes, these may not be a coincidence.
New research from the McKinsey Global Institute makes it clear that 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.
McKinsey Global Institute suggests people should change how they think about which advancements make society richer over time and comes to the conclusion that as the economy returns to full employment, a surge in productivity is a real possibility – thus creating overall economic growth.
This idea should excite both conservatives and liberals. It suggests the Trump administration’s ambitions for faster growth driven by rising productivity are not as outlandish as warier forecasters have argued. The research also tends to back arguments by liberal-leaning commentators that the Federal Reserve ought to move cautiously in raising interest rates, with the hope that the economy can repair itself from damage caused by the 2008 recession and its aftermath.
Researchers now believe productivity growth depends not just on the supply side of the economy (what companies produce and what technologies they use to do it) but also significantly on the demand side. Meaning, productivity advancements do not happen in a vacuum just because technology is available. Productivity progress also happens because companies need to increase production to match demand for their goods, and a shortage, either of workers or materials, forces them to think creatively about how to do so.
Now, companies are having a harder time finding qualified workers, and with demand for their products rising, they will have no choice but to re-engineer how they work to increase productivity. Higher productivity will, in turn, make it easier to justify higher wages, creating a self-reinforcing cycle of higher economic growth.
The concept is not a cause for celebration yet. First, the theory must hold up — that a tighter economy will feed into higher capital investment and businesses will experiment to find new efficiencies. Second, it will then feed into a virtuous cycle in which more productivity creates more growth and vice versa. Third, the growth then turns into wage gains for workers who have not seen many of them in the last decade.
- 2 Mar, 2018
- Josh Smith