WHEN EVALUATING THE
health of economies, we most often consider GDP growth rate as the relevant metric. In general, not enough attention has been paid to total factor productivity (TFP), an underlying metric that measures the combined productivity of labor and capital, and has a powerful effect on GDP growth.
If we make a concerted effort to boost the productivity of our businesses, Wisconsin has an opportunity to become a national leader in finding a solution. With this goal in mind, the Wisconsin Economic Development Corp.(WEDC) has begun working with the Wisconsin Manufacturing Extension Partnership (WMEP) and the Metropolitan Milwaukee Association of Commerce (MMAC) to develop methods to help companies identify and address drains on productivity, and then harness the power of innovation to address the identified problems.
Slow growth, rising wages
For the United States as a whole, TFP grew at an average rate of 1 percent per year from 1999 to 2006, but slowed to an average rate of 0.5 percent per year from 2007 to 2013.
The growth of the economy as a whole follows a similar pattern, indicating the role TFP plays in overall growth. In the 1950s and ’60s, annual growth rates for the U.S. economy averaged more than 4 percent; the annual average growth rate fell to around 3 percent in the ’70s and ’80s, and has fallen below 2 percent in recent years. There is a near-perfect correspondence between increases in productivity on the one hand, and increases in median household income, on the other. As productivity rises and falls, so do wages.
The trend of declining productivity will not simply reverse on its own. Rather than look to government, which does not seem inclined to take action on this issue, we must start with Wisconsin companies. In particular, we are looking to the manufacturing sector to lead the charge.
Manufacturing’s crucial role
Manufacturing is responsible for almost 19 percent of the state’s total GDP, and manufacturing employment makes up more than 16 percent of the state’s workforce. Although the sector was hit hard in the last recession, it was also this sector that led Wisconsin out of the recession and saved the state’s economy from a deeper decline. The state’s strong and resilient manufacturing sector has been, and will continue to be, a critical, key driver of the state’s economic health.
Productivity gains can come from a number of factors: improving workers’ efficiency, investing in new equipment, developing new technologies, improving supply chain management, transforming production processes, and mining data for operational trends and performance, among others.
One initiative already underway showcases the holistic, companywide perspective businesses must take to identify opportunities to boost productivity. WMEP’s Profitable Sustainability Initiative (PSI) recognizes the connection between sustainability and efficiency: for example, reducing the amount of energy used in a production process leads not only to environmental benefits, but also to cost savings for the company.
PSI has shown that the notion that sustainability costs companies money may be just plain wrong. Data on the first 100 companies to participate showed that collectively, the companies logged nearly $15 million a year in operational cost savings and nearly $150 million in sales increased or retained as a result of their participation.
Boosting productivity will require a mindset shift for Wisconsin companies. They must commit to continuous improvement and to constant, rigorous analysis of every facet of their businesses to identify opportunities for improvement.
With this mindset shift, I believe we can successfully reverse this trend, and Wisconsin can become a leader in productivity growth. Now is the time to take action: WEDC, WMEP and MMAC have already committed to devote resources to solving this pressing economic performance problem. We will work with our network of partners across the state to help companies implement solutions that not only lead to resumed economic growth, but position our manufacturing sector for a prosperous future.
Lee Swindall is vice president of sector strategy development with the WEDC. He has more than 30 years of experience in business development, management consulting and corporate and industry analysis.