The long US worker productivity drought may end

“The pandemic has pushed older people into using technology and has pushed the economy in general to adopt technology,” said Constance Hunter, chief economist at KPMG. “We will continue to invest in productivity-enhancing technologies because the pandemic has really made it so clear that we need that digital backbone.”

Business investment rose 17% in computer equipment, 6% in software and 1% in research and development, although GDP fell 2.4% in the fourth quarter from the same period last year. Investments in automation and technology accelerated to 7% year-over-year growth in the third quarter of 2020 from 5% growth in the same period a year earlier, according to an analysis of financial metrics from 4,000 U.S. companies by the McKinsey Global Institute. Those gains could spread. About 75% of respondents to a December McKinsey survey of North American and European companies expected to accelerate investment in new technologies in 2020-24, up from the 55% who said that spending would increase in 2014-19 to have.

This allows companies to increase productivity, which is defined as output per hour worked. Stronger productivity growth is key to the long-term success of the economy. Economic growth depends on the number of workers and how much they produce. Without productivity growth, economic growth must rely on more workers, which could be difficult to achieve as the workforce ages and the pandemic has pushed millions of Americans out of the workforce.

Higher productivity growth should also put more money in people’s pockets, as wages depend on how much workers produce. That would allow firms to raise wages without raising prices and dampen inflationary pressures. Wage growth was tepid for many years after the financial crisis, only exceeding 3% in 2018.

Productivity growth tends to move in multi-year trends, reflecting changes in the structure of the economy. Excluding farms and government, it grew at 2.8% per year from 1949 to the 1973 oil shock, then slowed to 1.4% from 1974 to 1995, accelerated to 3% from 1996 to 2005 with the spread of computers and the Internet and then slowed again to 1.4% between 2006 and 2019. Last year, it accelerated to 2.4% in the fourth quarter of 2020 from the same period last year, although this was due to the coronavirus leading to sharp job losses in lower-wage sectors that tended to be less productive.

Robert Gordon, a Northwestern University professor who has studied productivity and living standards over the past century, said productivity growth slowed after 2005 because computing profitability slowed and new inventions like smartphones and tablets failed to revolutionize business operations. In 2015, he had forecast productivity growth of just 1.5% per year for the next 25 years. Recent developments have made him more optimistic, and he expects annual productivity growth to be around 1.8% this decade.

A shift towards e-commerce should boost productivity by eliminating the labor needed in brick-and-mortar stores, Mr Gordon said. Video conferencing should also help, although the public transport sector could offset some of the gains as buses and rail will carry fewer passengers, he said.

Some economists are predicting that the increase in infrastructure investment proposed by President Biden last week could also boost productivity growth.

Healthcare could see a productivity boost after Covid-19 abates. Virtual consultations have proliferated during the pandemic at the Stanford Health Care CardioClick Clinic in Stanford, California. Patients were able to join a video call to discuss their diet, exercise and sleep habits with a medical expert.

Video visits to the cardiac clinic last about 22 minutes, while in-person visits typically last three times as long. Video consultations are also much more likely to end on time, allowing doctors, nurses and nutritionists to quickly switch between patient calls, said Chris O’Dell, administrative director of digital health at Stanford Health Care.

“These are both really good indicators that vendors are more productive when making video,” said Mr. O’Dell.

At Stanford Health Care clinics, virtual doctor-to-patient visits now account for about 30% of all outpatient business, up from 1% to 2% before the pandemic. “As a result of the pandemic, we have seen a massive and sustained surge in virtual healthcare,” Mr. O’Dell said. “I think it will remain after the pandemic.”

With the advent of Zoom and Microsoft Teams, video conferencing may replace some business conferencing. As a result, employees do not lose productive working hours when they travel long distances. They will also have more energy to get involved because they no longer have to deal with the hassles of the daily commute. Remote work could boost post-pandemic productivity by a one-time 4.7%, though much of the growth will come from shortened commutes, which the government’s productivity data won’t fully capture, according to a working paper by Nicholas Bloom and Stanford University co-authors .

Less travel stress also has advantages. “Happier workers are more productive people,” said Bart van Ark, director of the UK’s Productivity Institute. “People who have more energy and are less tired are also more productive people.”

write to Sarah Chaney Cambon at sarah.chaney@wsj.com