Global: Clueless on Productivity
Stephen Roach (New York)
Morgan Stanley
Sept 05, 2003
I just blew another productivity opportunity. I spent the first 45 minutes of my workday fighting the mindless edicts of the technology gods. I always remind myself not to take it personally. After all, I am only one of America’s some 83 million IT-dependent knowledge workers. I guess that’s just the point: To the extent others feel the same pain, there may well be good reason to raise serious questions about America’s widely celebrated white-collar productivity miracle.
Fortunately, my trusty workstation sprung back to functional life just in time for the early morning barrage of US economic data. To add insult to injury, the headline release was a stunning upward revision to 2Q03 productivity — specifically, a 6.8% sequential (and annualized) surge in nonfarm business productivity. This was about one percentage point greater than indicated in the preliminary estimate and fully two percentage points faster than average gains of 4.7% that had been recorded over the first six quarters of this most unusual cyclical recovery.
But what really caught my eye was some of the detail behind the aggregate productivity trend. Inasmuch as manufacturing sector output-per-hour rose by “only” 3.7% in the second quarter, it doesn’t take a rocket scientist to figure out that the bulk of the latest productivity spurt had to originate in the services sector. With goods sector output amounting to around 40% of real GDP, a back-of-the-envelope calculation implies that nonmanufacturing productivity — a good proxy for the services sector — had to rise in excess of an 8% annual rate in 2Q03 in order to square the circle in the aggregate productivity calculus. The irony of it all: Here I am bemoaning the trials and tribulations of the Information Age and the latest report coming out of the government suggests that the white-collar services sector — my sector — is leading the charge in America’s productivity-led recovery.
To be sure, quarterly productivity statistics always need to be taken with a grain a salt. But the same general point holds when decomposing the growth in output-per-hour on a more reliable year-over-year basis. In the four quarters ending 2Q03, the increase in manufacturing productivity (3.5%) was below the gain in overall nonfarm business productivity (4.1%). A strong increase in services sector productivity is the only way to reconcile these numbers; my rough guesstimate points to nonmanufacturing productivity growth of 4.5% on a year-over-year basis — about 30% faster than measured gains in manufacturing.
This is where the productivity miracle falls apart, in my view. I honestly don’t think we have a clue as to how to measure productivity in the white-collar services sector. The problems lie both in the numerator (output) and the denominator (labor input) of the productivity equation. The production of the proverbial “widget” makes measurement of tangible output in the manufacturing sector relatively easy by comparison. The intangible output of services is a different matter altogether. Measuring quality-adjusted value-added in knowledge-based activities is tough in theory and virtually impossible in practice. Yet that’s exactly what the productivity metric requires us to do. Is it correct to measure the output of a software programmer, for instance, by the lines of code that he or she writes? Or the number of words that an analyst produces? Or is less more? To me, the efficient software program and the insightful piece of analysis wins, hands down. Try measuring managerial output — hardly a trivial consideration given that managers account for fully 25% of America’s total white-collar workforce.
As tough as it is to measure the numerator in the white-collar productivity calculus, I have long been equally critical of efforts to capture the denominator — labor input. The official data on labor input comes from the establishment surveys of the US Bureau of Labor Statistics; at the crux of this gauge is an estimate of the length of average work schedules. For white-collar knowledge workers, these numbers simply don’t make any sense to me. Take financial services — an industry in which I have spent my entire career. According to the BLS, the average workweek in the financial activities sector was 35.4 hours in July 2003 — essentially unchanged from the level a decade earlier (35.6 hours in July 1993). I find that most difficult to fathom. Over the past decade, the IT-enabled knowledge worker has seen a radical transformation of work schedules. Courtesy of miniaturized and portable information appliances, together with near-ubiquitous connectivity, workdays have been extended as never before. Yet in this increasingly “24 x 7” mindset, the official data speak of unbelievably short and unchanged work weeks. What a disconnect!
To me, this smacks of a classic measurement problem. The official data seem to underestimate woefully actual hours worked in America’s increasingly knowledge-based, white-collar economy. We are guilty of confusing extended work schedules with productivity growth. I’ve said it before: Productivity is not about working longer. It’s all about generating more value added per unit of labor input. To the extent that government statisticians are undercounting work time, it follows they are guilty of overstating productivity. With America’s newfound productivity gains skewed increasingly toward the white-collar services sector, this statistical conundrum takes on even greater meaning for the economy as a whole.
Which brings me full circle to the 45 minutes of time I wasted this morning. Bear with me as I take you through some math in an effort to scale this phenomenon. Assume I’m not alone — that we’re all in this together. Based on a standard 8-hour work day, such an episode of IT-imposed downtime is the functional equivalent of 7.8 million lost work days for the US economy as a whole. Multiply that by the frequency of such occurrences — at least once a week in my line of work — and we’re talking about a serious loss of productive work time for the overall US economy. At an annual rate, it amounts to nearly 2% of total work time — a large hit to the productivity calculus for any nation.
Of course, the episodic glitches of the Information Age are only the tip of a much bigger iceberg. This morning’s headache involved two mandatory tasks — cleaning out the excesses of my e-mail inbox and changing the passcode to my voicemail. Over the years I have become quite adept at performing these tasks, but there’s no getting around the time-intensive nature of the response. And yet these tasks occur with increasing frequency. In a world of information overload, e-mail inboxes hit their limit in shorter and shorter timeframes and the proliferation of passcodes has no end in sight. But the real story is the IT-enhanced nature of everything else we do, and how this seems to generate a “systems approach” to work structures that builds an ever-greater bias to wasted time. All too frequent software upgrades, crashing servers, new viruses, and helpless help desks only compound the problem. Our Firm is now embarking on its annual performance review ritual — an IT-enabled effort that has truly taken on a highly labor-intensive life of its own over the past several years.
I fully realize all this is heresy. But I fear that in our rush to rationalize the wisdom of our ways, we have lost sight of the pitfalls of the Information Age. The white-collar services sector continues to haunt me in this regard. In days of yore, service companies were quintessential variable-cost producers. Their main assets were people, whose headcounts and compensation could be adjusted in close conformity with the ups and downs of the business cycle. But then service companies discovered IT. They spent massively in building an entirely new infrastructure — not just hardware, but also software and legions of IT-support workers. In going down this road with reckless abandon, the service sector has been transformed from variable- to increasingly fixed-cost producers. Little wonder the mild recession of 2001 gave rise to the worst earnings carnage in modern history. That’s what lurks on the downside of an IT-enabled economy.
Economics is a big puzzle. There are always a few pieces missing as we try to peer into the future on the basis of what we know about the past. History tells us that productivity is the Holy Grail of economic prosperity. But that was a history that was written for a very different economy — largely a blue-collar, manufacturing economy. When it comes to services productivity, I am afraid that I continue to believe that we’re guilty of exaggerating the miracles.
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