Productivity growth has stalled – are we measuring it wrong? Or can we really do less with more? The service economy and inequality might be to blame.

Productivity is the current economics wonkery topic du jour. With his recent 700-page tome on why productivity growth is slowing down, and the spate of articles that followed, Robert Gordon is to 2016 what Thomas Piketty was to 2014.

It’s a topic that even has two dimensions – on the micro level, what is causing low productivity growth? On the macro level, is productivity growth actually slowing, or can we just not measure it correctly?

Either way, the numbers currently show that productivity growth is indeed low – lower than it has been in decades.

Just to step back, productivity is basically the output per person per hour of labor. A Ford plant can produce many more cars per worker per hour today than it could in 1950, let alone 1990. Technology is the main driver of productivity growth – which is baffling to observers. An iPhone has exponentially more computing power than a computer with an Intel 386 processor running Windows 3.1 – and at a fraction of the cost. Watch a video of a Tesla factory, and it’s clear that we can make more with less, but the numbers just aren’t showing that. Why is that?

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First, the shift of the economy from manufacturing to services. “China is stealing our jobs” is only a half-truth – it’s more like robots are taking everyone’s manufacturing jobs, because even the US manufacturers a lot more now than it did in 1980.

Regardless, manufacturing productivity has skyrocketed, but more people have shifted off of plant floors and into retail stores, food service, healthcare, and education. These service industry jobs inherently have lower productivity growth potential. Our Ford plant can make many more cars per worker today than 30 years ago, but it still takes the same number of people to play in a string quartet as it did in 1880 (a favorite example of economists). With a higher proportion of the population moving into productivity-growth-depressed jobs, the economy is going to have less of a chance to make the same kinds of efficiency gains like we saw in the 20th century.

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Second, poor demand management. As recently noted in the Economist, there is a link between low wages and low productivity growth. For now, there is enough slack in the economy to put a lid on wage growth, so employers can still substitute low-wage labor for high-cost capital investment.

For this low-wage, low-productivity environment, we can blame low demand. If demand were higher, wages would rise, and companies would start to make the capital investments to make their workers more efficient. But rich countries have seen growing output gaps, causing both investment and demand to fall.

Ultimately, labor will be on the losing end of that equation, no matter what the wage level might be. But in the interim, advanced economies just aren’t making the investments to increase efficiency and boost economic growth moving forward. We can see that in the markdowns of future GDP estimates.

Piketty’s Productivity Paradox

Third, and probably least discussed, is growing inequality. As utility theory states, those who are wealthy want to keep wealth, so there is diminishing marginal value of money. That means that the wealthiest look to safeguard their assets, rather than put them to work in riskier ventures – and who can blame them? In a low-demand environment, who knows what kinds of investments will pay off in the long-run?

Either way, more money is finding its way into fewer hands, and in turn, it’s being shifted toward safe, low-risk, low-return assets – just take a look at German and Swiss bond yields. However, this quickly becomes a vicious cycle. With investors parking money in bonds at negative yields, businesses are sapped of investment capital – especially in the types of growth industries that are responsible for not only job creation, but also underlying technology that drives productivity growth. Over time, the economy shows lower growth potential, fewer jobs are created, demand falls, inequality further widens, and we’re right back at home plate – just with several points of future GDP shaved from estimates.

Solutions? Who Needs Solutions When You Have Tons Of Cheap Labor

There are many compartments to unpack to solve this issue, but the easiest would be to first solve the demand issue. Central banks have gone about as far as they can go in terms of efficacy – with rates at zero (or lower), money has never been cheaper for businesses to borrow to make capital expenditures. But they just aren’t – in the short-term, wages are just too low to make productivity-increasing investments, and in the medium-to-long-term, the future is just too uncertain.

The ultimate solution is to increase the level of human capital (read: education and re-training workers). Then, workers will be in a better position to combine human labor with technology to maximize output. However, this is a long-term commitment, and it will be irrelevant unless we can change the short-term course. By focusing on the demand side right now, whether it’s a very loose fiscal policy, or outright helicopter drops, at least there’s a chance that companies might finally be jostled into increasing worker productivity. The future depends on it.