“Productivity isn’t everything, but in the long run it is almost everything,” wrote Paul Krugman more than 20 years ago. “A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker.”
There is a virtuous cycle between productivity and people: Higher levels of productivity allow society to reinvest in human capital (most obviously, though not exclusively, via higher wages), and smart investments result in higher labor productivity.
Unfortunately, this virtuous cycle appears to be broken. Productivity in most developed economies has been anemic. In the decade between 2005 and 2015, labor productivity in the US as measured by GDP per labor hour was less than 1% for 7 of the 10 years, according to the OECD. And wages are stagnant. US unemployment hit its lowest level in 16 years this past May, yet wage growth has been sluggish compared with similar periods in the past. Of course, low productivity can depress wages, but in recent decades, wages haven’t grown as much as expected even during periods of robust economic productivity growth. “For most of the last half-century — 84 percent of the time since 1966 — average wages have grown more slowly than would be predicted based on productivity and inflation growth,” The New York Times reported. During much of this time, it has been shareholders, not workers, who have reaped the benefits of higher productivity.
All of this raises a chicken-or-egg question: Are we suffering from low productivity because we have underinvested in human capital? Or are we unable to invest in human capital because structural factors are permanently reducing productivity?
The evidence suggests the former: We could improve productivity if we stopped systematically underinvesting in human capital. The most direct and obvious investment is increased wages. Beyond wages, other forms of investment in human capital include education and training, improved healthcare, and other, less obvious investments, such as the time and space to explore new ideas and professional development opportunities. In research for our book, Time, Talent and Energy, my co-author Michael Mankins and I found that such investments do indeed pay off: The top-quartile companies in our study unlocked 40% more productive power in their workforce through better practices in time, talent and energy management.
Let’s look at three investments — in wages, time and energy — that could reinvigorate the productivity cycle:
Wages. Higher investment in wages does not need to come at the expense of customers and shareholders. In The Good Jobs Strategy, Zeynep Ton, a professor at the MIT Sloan School of Management, demonstrates how the best retail companies align their customer value proposition with their operations strategy and their approach to human capital. Customer advocacy and employee engagement are inextricably linked in the examples Ton uses, allowing those companies to create a better customer experience, higher quality jobs and better financial outcomes for shareholders. Small and large companies alike are experimenting with these concepts. Managed by Q, a cleaning and office services company in New York City, decided to pay employees higher wages than the prevailing market rate. In turn, the company is achieving lower levels of employee and customer churn, and correspondingly lower employee hiring and customer acquisition costs. The compounding and virtuous effects of increasing customer and employee advocacy more than offset the higher cost of wages. At the other end of the size spectrum, Walmart has committed to investing $2.7 billion in its associates through higher wages, better benefits and enhanced training.
Time. Our careless treatment of time represents a shocking level of underinvestment in human capital. For knowledge workers, time is incredibly scarce. Our researchsuggests that, on average, managers have fewer than seven hours per week of uninterrupted time to do deep versus shallow work. They spend the rest of their time attending meetings, sending e-communications or working in time increments of less than 20 minutes, a practice that makes it difficult to accomplish a specific task and in the worst cases can lead to employee burnout. We know that great ideas that drive breakthroughs in productivity come from human beings with the time, talent and energy to innovate.
One step in reversing this trend is to start treating hours like dollars, with a real opportunity cost. Companies should seek to systematically eradicate organizational drag — all the internal complexity that leads to inefficient and ineffective interactions. Giving managers more time to do deep thinking can unlock innovations that can have a significant impact on productivity. Companies that follow the Toyota Production System use Kaizen events to improve productivity on the manufacturing line. That requires pulling workers off the line and giving them the time and space to make processes leaner or to devise innovative work methods. Similarly, many organizations are experimenting with using Agile sprints beyond the traditional areas of product development and innovation. A well-run sprint takes talented, cross-functional team members out of their daily routines and focuses them in weekly increments on creating breakthroughs in products or processes. Both Kaizen events and Agile sprints are investments in innovation and human capital productivity. Many tech companies have experimented with giving employees unstructured time to explore new ideas such as LinkedIn’s InCubator, Apple’s Blue Sky and Microsoft’s Garage.
Energy. Perhaps the most transformational thing a company can do for its workforce is to invest in creating jobs and working environments that unleash intrinsic inspiration. This is the gateway to the discretionary energy that multiplies labor productivity: An inspired employee is more than twice as productive as a satisfied employee and more than three times as productive as a dissatisfied employee. Yet, only one in eight employees are inspired. We measure organizational energy through employee engagement, and despite decades of investment in engagement programs, levels of engagement remain systemically and stubbornly low.
As companies think about how to change this, they should focus on the jobs that will survive into the future. The forces of creative destruction inevitably will continue to eliminate some work through automation, digitalization, or the virtualization of work, but these same forces also create new types of work and jobs. Creating inspiring jobs and engaging working environments requires holistically addressing the factors that drive employee inspiration, which we outlined in Bain’s pyramid of employee needs. This includes more autonomy and agility as well as inspirational leadership. Companies like IBM are working hard to deploy design thinking throughout the enterprise. Others, such as ANZ, the Australian-based banking giant, have committed to adopting Agile at scale in less than a year, following some of the proven practices used by Spotify, the music streaming company.
For too long, business objectives and management philosophies have focused on efficiency over productivity. This has not only resulted in less investment in human capital but has also delivered lower total shareholder returns despite a period in which the cost of capital (and thus the cost of investing for growth) has been extraordinarily low. It’s not money that’s in short supply; it’s good growth ideas.
Robert Gordon, a macroeconomist at Northwestern University, has shown that periods of breakout productivity in the United States were not the result of capital deepening(applying more capital to each hour of labor), but of what economists call total factor productivity, a catch-all measure for the impact of technological innovation. Who has these inspirational ideas and translates them into productivity-driving innovations? People do. This is why we believe that human capital, not financial capital, is often your scarcest resource. Reinvesting in this scarcest resource could unlock new levels of labor productivity for the economies and companies around the world that are sorely in need of it.
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