John Pientka

The Economy Just Limps Along. Guess Who’s to Blame?

Productivity seems down the drain. Unemployment is at historic lows yet real wage growth is pathetic. Why? Hard to believe but there are not enough robots!

Put away your fears of being automated out of your job. Trash the hyperbole coming out of Hollywood that the coming of Artificial Intelligence will mean doom for mankind. We have a much more challenging issue to confront if we want to return to prosperity. The key word here is digital or better yet, the lack of it.

We are stuck with a conundrum. Our economic statistics and theories don’t seem to be good guides to managing our way back to healthy growth. Some theorize that our best days are behind us: our society has lost its innovativeness or demographically we are getting too old. Others say that for all the modern, almost Sci-fi concepts pouring out of Silicon Valley and elsewhere none of them has done anything to jack-up the economy. Some argue that it’s really just an illusion and we are not measuring productivity in our economy correctly because it has changed so much to being service dominated.

But some clever insights have revealed the real issue: most of us work in industries where productivity growth is stagnant or even negative and the trend is just getting worse. Productivity is the cornerstone of growth and prosperity. The more an individual can produce, the faster the standard of living rises. Today the fastest way to increase productivity is to incorporate digital technologies but we are not doing it. Take a look at the following analysis from McKinsey:

Most of America’s GDP has a very low incidence of digitization as the chart points out. But, compare them with projections from the U.S. Bureau of Labor Statistics (BLS) and we find that the highest expected employment growth is in healthcare at a 1.9% Compound Annual Growth Rate (CAGR) followed by construction at 1.5% CAGR. Yet, these are two of the lowest adopters of digital technology and hence productivity growth.

Take a look at Information and Communications Technology sector (McKinsey calls this ICT). Basically, this is the “hi-tech” industry and definitely they eat their own dog food with a digitization score of 100. Note: it accounts for 6% of our GDP (and using those same BLS statistics) we can see that it only employs 1.8% of the total U.S. workforce.

Now look at construction with the lowest digitization and productivity. It generates 4% of the GDP but it takes 4.1% of the workforce to do it. ICT gets more than three times the productivity per worker than construction does. Any wonder why the wages and perks are so good in hi-tech? Ever see any robots on a jobsite?

It turns out we are not churning up the job market with new technology fast enough. A newly released study from the Information Technology and Innovation Foundation demonstrates this pretty exhaustively. The authors go back to 1850 and identify that job movement between occupations, a good measure of technology driven job change, is the lowest in history and the fastest growing industries are the least productive.

We are our own worst enemies here. This is a manifestation of “Baumol’s Cost Disease” where over time more affluent societies spend increasing amounts of income in sectors that have lower productivity growth. Healthcare and Education in the U.S. are superb examples of that. Both are over ripe for some disruption and improvements in cost effectiveness.

The implications for business and political leaders are clear: forget the hype or the handwringing; embrace the potential of digital technologies and prepare bridges to temper its impact on people this will affect.

By John Pientka

John Pientka

John is currently the principal of Pientka and Associates which specializes in IT and Cloud Computing.

Over the years John has been vice president at CGI Federal, where he lead their cloud computing division. He founded and served as CEO of GigEpath, which provided communication solutions to major corporations. He has also served as president of British Telecom’s outsourcing arm Syncordia, vice president and general manager of a division at Motorola.

John has earned his M.B.A. from Harvard University as well as a bachelor’s degree from the State University in Buffalo, New York.

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