Productivity Driven By Capital Investment, Educated Labor

A new study by the MAPI Foundation (Manufacturers Alliance for Productivity and Innovation) analyzes productivity growth in manufacturing over the past 25 years and provides “compelling statistical evidence on the importance that capital investment and educated labor have on productivity performance.”

I guess what this study highlights are factors that should have already been well known. Plus the study was financed by Rockwell Automation—a technology developer and supplier—which is an interesting caveat. MAPI is an organization composed of manufacturers and suppliers. I’d really see one of the follow-ups discuss what manner of investment makes the most difference.

The research explores the drivers of productivity performance on subsectors. In particular, the study looks for ways that manufacturers who have already invested in capital equipment can increase productivity and innovation.

Productivity Series

The report is the first in a series on productivity that the MAPI Foundation is producing this year. Cliff Waldman, director of economic studies at the MAPI Foundation, produced the study using well-accepted theory and regression analysis of several decades’ worth of data. The study reveals evidence that innovation and capital investment play a significant role in driving multifactor productivity growth (i.e., output per unit of a combined set of inputs including labor, materials, and capital) in a wide range of manufacturing subsectors. Capital investment is the mechanism by which productivity-enhancing innovation spreads through companies, supply chains, and the broad economy.

“In the manufacturing sector, strong productivity performance is needed to meet the globally driven challenges of cost pressures and competitiveness,” Waldman observes. “For both manufacturing and the economy as a whole, the recent slowdown in productivity causes concern, because it contributes to both slow output and wage growth.”

“Isolating the critical investments required to improve productivity performance is an important foundational element in the MAPI Foundation’s first study,” added Joe Kann, vice president of global business development at Rockwell Automation. “We look forward to the conclusions regarding industry-specific productivity drivers that will be identified in the remaining studies.”

Educated Labor

Waldman’s research finds that another key link to productivity performance is the labor force participation rate of the population holding a B.A. degree or higher, in effect the economy’s supply of educated labor.

The manufacturing sector, a traditional driver of overall productivity, has seen its pace of productivity growth slow over the last 15 years. As Waldman notes, part of this is due to slowing productivity growth in the computer and electronic products industry, which has played an outsized role in driving manufacturing productivity growth in recent decades.

According to the study, industry subsectors that have experienced relative improvements in productivity performance since 1993 include machinery, transportation equipment, and printing. But their growth has not been enough on an absolute basis to replace the decline in computer subsector productivity. Industries with a noticeable drop since 1993 in their relative pace of productivity growth include primary metals and petroleum and coal products.

Sector Correlations

The paper reveals strong cross-subsector correlations for both labor productivity growth and multifactor productivity growth. The apparent interconnectedness of productivity performance across industries, says Waldman, is likely the result of supply chain linkages, innovation spillovers, cluster impacts, and trade channels. Such evidence suggests that, where investments in any one industry lead to faster productivity growth, such expenditures can have impacts that extend to other subsectors as well.

Waldman concludes that a beneficial policy response must consist of a coordinated program that stimulates manufacturing equipment investment as well as innovation investment and increases the supply of educated labor in the broad economy. The MAPI Foundation’s next study on productivity builds on this work and will reveal the findings of a national survey on technology and automation investment that was conducted to determine the drivers and pace of change in various manufacturing industries.

 

Summary of major findings include:

  1. While the computer and electronic products subsector has historically played an outsized role in the relatively strong productivity performance of the broader manufacturing sector, productivity growth in the information technology space has slowed dramatically in recent years. This has happened as the high-impact innovation that led to persistent and rapid increases in computer processing speeds, which are necessarily accounted for in the calculation of computer-sector productivity growth, naturally reached physical limits. This is reducing manufacturing’s rate of productivity growth.
  2. Though the machinery and transportation equipment subsectors have shown notable improvement in their productivity performance over the past 15 years, it has not been enough on an absolute basis to make up for diminishing computer subsector productivity; overall manufacturing productivity growth is therefore languishing at historically weak rates.
  3. More than two decades’ worth of government statistics and regression analysis demonstrate that innovation and capital investment are directly correlated to and thus play a significant role in driving multifactor productivity growth in a wide range of manufacturing subsectors.
  4. An increase in the labor force participation rate of those with a B.A. degree and higher correlates to faster labor productivity growth in multiple industries. The supply of educated labor plays a definitive role in driving labor productivity growth across diverse subsectors.
  5. Statistical analysis shows a strong interconnectedness of productivity performance across subsectors. This evidence supports the hypothesis that because of supply chain linkages, innovation spillovers, cluster impacts, and trade channels, productivity determination is not independent across manufacturing industries. When changes are made in one industry that promote productivity, these can affect productivity performance in other industries as well.

 

 

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