The growth of Productivity - output per unit of input - is the fundamental determinant of the growth of a country's material standard of living. The most commonly cited measures are output per worker and output per hour - measures of labor productivity. A country can not have sustained growth in output per person - the most general measure of a country's material standard of living - without sustained growth in output per worker.
There are two ways to measure productivity - total (multi) factor productivity and labor productivity. Labor productivity measures the total output over the total hours worked. A company can increase labor productivity by purchasing a computer workstation and CAD software to help a worker become more productive when performing the task of creating design drawings because the individual could create more drawings per hour than it would take them to draw them on a draftboard. Total (multi) factor productivity is calculated as the difference between the growth rate of real output and the weighted average of the growth rates of capital services and hours. Multi-factor productivity would take into account, among other things, the cost of the computer workstation and software. Multi-factor productivity can be interpreted as a crude measure of innovation.
In the 1990s, the United States saw increases in Productivity that were mainly due to the adoption and diffusion of information technology.
- Competitiveness Index: Where America Stands, The Council on Competitiveness
But for the first time ever, Manufacturing Productivity in the United States had experienced six consecutive quarters of negative productivity and it's lowest quarterly change ever
This low productivity comes at a time when we experienced the third highest increase in labor cost in the last twenty years.
Unit Labor Costs
Low productivity growth follows low business investment. This is true in our recent business cycles. Investments, while lower, were real estate investments that did not provide the anticipated Return on Investment. All of the growth that we saw recently was due to consumer spending instead of income and productivity growth. The consumer spending was based on consumer debt, and thus our consumer disposable income to debt ration is at an all time high - this type of consumer spending is not sustainable.
We must invest in business - particularly small to medium size business - if we want to increase income and deliver higher wages to consumers which ultimately will result in more consumer spending. Business investment in computer equipment and software will see the biggest return on investment. The cost of technology has decreased significantly in the last decade. The cost of computer equipment has dropped 75% since 1995 and 50% since 2000. Technology that was once only for large companies is now affordable for Small to Medium Size Businesses.
The countries and the industries that have emerged as the leaders in the last hundred years in the world are the countries and industries that have led in raising the productivity of the manual worker - the U.S. first, Japan and Germany second. Fifty years from now, if not much sooner, leadership in the world will have moved to the countries and the industries that have most systematically and most successfully raised knowledge worker productivity.
For the aforementioned reasons, the first two missions of the The Innovation Machine is to
1) Increase the productivity of the Knowledge Worker.
2) Increase business investment in computer equipment and software.
Ignoring Productivity at our Peril, Center for American Progress