For those in favor of higher incomes and more leisure time, few topics may be as important as labor productivity growth—at least economically speaking. Long before he began penning opinion pieces for The New York Times, Nobel Prize-winning economist Paul Krugman quipped that “productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
In this regard, the U.S. has been exemplary, until recently.
Productivity Slowdown Acute in Manufacturing
Despite advances in technology; business and human capital investment; and other improvements one can point to during the past decade, labor productivity gains have been minor. From 2007-2018, productivity growth slowed to 1.3% annually within the nonfarm business sector, according to the Bureau of Labor Statistics.
Within the manufacturing sector, that figure is roughly half—a mere 0.7% labor productivity growth annually. Zooming in on the last decade, there has actually been zero net average productivity growth in the past five years, meaning economic output moved in lockstep with the number of hours worked, rather than rising. It’s startling when we consider Krugman’s caution. And how is it occurring with all the enthusiasm surrounding advances for Industry 4.0, digital transformation, and smart manufacturing?
Learn from Explorers and Trailblazers
Earlier this spring, MAPI and Deloitte partnered on research to unravel some of this productivity conundrum by studying the business impact of smart factory initiatives at large U.S. manufacturers. Surely it matters for labor productivity growth to accelerate operational improvements by connecting machines, people, data, and value chains?
It does. A subset of companies with smart initiatives underway have seen significant results, including 12% gains in labor productivity on average over three years. A leading cohort of “trailblazers” report this is even higher. Smart factory transformation holds a key to labor productivity growth, but it does not occur as a “big bang.” We learned that despite buy-in on the importance of smart factories (86% agree smart factories will be the main driver of manufacturing competitiveness in five years), nearly half of the 600 large industrial manufacturers we surveyed had not begun their journey with any smart initiatives.
Consider the Lift from Smart Initiatives
Given current industry maturity, Deloitte estimates that smart factory adoption will accelerate from 2025 as most manufacturers will likely leverage advanced technologies. We therefore classified adoption of smart factories into two phases—phase 1 (2019–2024) that will likely experience relatively slower adoption and phase 2 (2025– 2030) that will likely experience accelerated adoption. Using the study data on smart factory impact and Deloitte’s economic forecasting model, we anticipate a rise in the compound annual growth rate for labor productivity to 2.0% from 2019 to 2024 and 2.3% from 2025 to 2030.
Review the Smart Factory Short Take for more detail on the estimates and assumptions behind the labor productivity growth calculations.