Economic Growth: Wages And The Productivity Paradox

Sluggish wage growth and weak productivity growth are two trends that investors and analysts need to keep an eye on next year according to Goldman Sachs’ “Top of Mind” end of year Global Macro Research report.

Productive in both the US and the UK remains depressed, despite lower unemployment and economic growth. For example, US productivity growth reached 2.2% on an annualized basis in Q3, a short-term high. However, productivity data is noisy, and like any economic figures, the data should be evaluated over a longer time horizon — not over a period of just three months. Over the last year, US productivity grew just 0.6%, exactly in line with the disappointing five-year annualized average and well below the long-run historical average of just over 2%. It other words, productivity is improving but there’s still a long way to go.

Similarly, the UK productivity growth increased to the fastest pace in four years during the first half of 2015 (latest data), but once again, underlying figures show a more gradual improvement. UK output grew 0.9% in Q2, the strongest quarterly growth rate in four years, however, output per hour has only risen by 1.3% over the past twelve months, which is little more than half its pre-crisis average of 2.2%.

It’s not clear what’s causing this “productivity paradox”, although Goldman speculates that the inadequacy of today’s statistics in capturing productivity gains made by technology could be to blame. Manufacturers are plowing a considerable amount of investment in the Internet of Things, a potential driver of productivity. According to the latest estimates from the International Data Corporation, manufacturers invested about $700 million in IoT in 2015 globally, and companies appear to be ramping up investment in headcount related to IoT as well.

Will 2016 bring an end to the productivity paradox? It’s not clear. For US productivity to return to more normal levels, Goldman estimates that productivity growth needs to go back to its 1.5% estimate of the current trend rate. However, investment in IoT devices/infrastructure (spending on IoT will reach nearly $1.3 billion in 2019) and the inability to measure productivity gains from IoT applications could continue to weigh on productivity gains going forward. A recent analysis by the Bank of England suggests a total of 95 million jobs could be at risk of automation in the UK and US.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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