What is Labor Productivity and Why Does it Matter?

I want you to care about labor productivity at the state level. Here’s a ChatGPT-supported primer on what labor productivity is and why it matters.

Labor productivity, the measure of output or value produced per unit of labor input, holds crucial significance at the state level. This economic metric directly impacts a state's health, competitiveness, and overall prosperity. States with higher labor productivity levels tend to experience robust economic growth, attracting businesses and creating job opportunities. This growth leads to tangible improvements in living standards, healthcare, infrastructure, and education, enhancing the quality of life for residents.

Conversely, low labor productivity can signal inefficiencies, hindering job creation and potentially leading to stagnant economies. In such cases, residents may face reduced access to quality healthcare and education, limited infrastructure development, and a less favorable living environment. Therefore, labor productivity serves as a vital tool for state-level policymakers, guiding their decisions on resource allocation, workforce development, and policies aimed at fostering economic growth. By prioritizing productivity, states can elevate the well-being of their citizens and build stronger, more prosperous communities.

Stanley Fischer, former Vice Chairman of the Federal Reserve Board of Governors, gave a talk in July 2017, titled "Government Policy and Labor Productivity." He expounded on the importance of labor productivity, stating that it is a basic determinant of the rate of growth of average income per capita over long periods. To understand the impact of productivity growth, consider this rule of thumb: divide 70 by the growth rate to estimate the doubling time of productivity. For instance, during the 25 years from 1948 to 1973, labor productivity grew at 3.25% annually, doubling in just 22 years. In contrast, from 1974 to 2016, the growth rate slowed to 1.75%, doubling the time to 41 years. This illustrates the significant difference in economic prospects across generations, highlighting the importance of productivity.

How has labor productivity been trending in the State of Michigan?

Overall, Michigan is not among the leading states with respect to it’s long run growth rate for labor productivity. Here’s an example that puts it into perspective.

Imagine two businesses, one in Michigan and the other in North Dakota, starting in 2007 with 100 units of output per unit of labor. Over the next 15 years, their paths diverge significantly. In Michigan, the average annual growth of 0.8% sees modest progress, reaching 113 units by 2022. In North Dakota, with a 2.7% growth, the productivity soars to 149 units of output per unit of labor. That difference is real money, real wealth, and real prosperity. This stark contrast in growth trajectories illustrates the transformative power of productivity rates.

For a more detailed analysis of recent trends (and data related to the thought experiment above), check out what the Bureau of Labor Statistics has published about state-level labor productivity, including the effects of the COVID-19 pandemic and specific changes in 2022. They’re fascinating.

The Opportunity

There is an opportunity to increase the long-run labor productivity growth rate in the State of Michigan.

Targeted strategies, rather than broad, sweeping changes, are more likely to yield positive results. The complexity of labor productivity issues necessitates a cross-sector vision and strategy, aligning efforts from the private sector, government, academia, the social sector, philanthropy, and the educational sector around a coordinated mission.

As I see it, taising labor productivity at the state level involves three distinct phases of work, with an assumption of continuous iteration.

The first phase is to deeply understand the problem. Michigan's world-class research universities should conduct research to understand what drives and hinders labor productivity in the state. This includes quantitative and qualitative research, examining factors like capital investment, skills development, and innovation, as well as under-utilized assets for improving productivity. We need to understand labor productivity deeply - by industry, by job type, by geography, and more.

The second phase involves a cross-functional group of major stakeholders and citizen groups selecting areas of focus (e.g., industry, types of jobs, regions of Michigan) that present unique opportunities for improving labor productivity. Success metrics and data infrastructure should be established early on to allow for dispassionate evaluation of implemented solutions. The cross-functional group could then moves to ideation, brainstorming solutions within each of the focus areas. Prioritization criteria - developed in advance - should then be used to narrow down possibilities, aiming to identify a set of small, quickly testable experiments.

This is worth nothing, the goal shouldn’t be to have huge transformation and an endless slate of big splash initiatives. At the beginning, learning is more important. And the best way to learn is to deploy small-scale programs quickly and cheaply.

After about a year, the group would start phase three by reconvening to assess the experiments, deciding what to scale, stop, or further test. This process will likely reveal systemic blockers, informing a data-driven policy agenda. The group can then iterate and scale the most effective strategies and pursue the most promising policy innovations for increasing labor productivity in Michigan.

I am excited about what’s happening in Michigan. A deep, cross-functional examination of labor productivity could bring together our most capable institutions and thinkers to collaborate and make our state more prosperous. We have great assets across sectors; all we need is the will and a framework to collaborate productively. Labor productivity matters and is a simple concept that can create an organizing framework and sense of shared purpose for driving transformational collaboration across sectors. We should strive to raise labor productivity together, at the state level.

In conclusion

Understanding and improving labor productivity is not just an economic concern; it's a pathway to enhancing the quality of life for everyone in Michigan. Let's not just witness the change – let's be the architects of it. There are so many exciting ideas (like the UM Detroit Innovation Center or the Growing Michigan Together Council) which might create opportunities for influencing labor productivity that are just starting in Michigan. Reach out, contribute your thoughts, and let's turn these ideas into actionable strategies. Together, we can forge a future where economic growth and prosperity are shared by all.

You can reach me at hello@neiltambe.com or leave a comment. I’m excited to hear from you.