AI, Technology and Productivity from a Workforce Industry Perspective

Introduction

Recently, I came across an article titled The Productivity Puzzle: AI, Technology Adoption, and the Workforce, authored by Erin Henry, Jack Taylor, and Pierre-Daniel G. Sarte. While the article presents a well-researched and academically sound perspective, I felt that some critical aspects were missing from the discussion. My intention with this response is to address those gaps and offer insights for leaders in the workforce industry and those shaping organizational strategies that directly impact our country's productivity and growth.

The rapid advancement of AI, technology, and other innovations has undoubtedly brought about transformative changes. However, these tools have also enabled decisions that prioritize short-term transactional returns, often at the expense of long-term economic stability. This has led to a financial landscape so complex that understanding market dynamics requires knowledge of algorithmic trading or strategies like the Yen carry trade and their potential effects on international lending rates.

Moreover, our healthcare industry has grown to become the fourth-largest contributor to GDP, comprising $4.5T of GDP and emerging as the single largest employer. Meanwhile, manufacturing, production, and engineering—the core drivers of economic output—have been outsourced to other parts of the world, enabled by ultra-optimized supply chains made possible through technology. Additionally, the cost of capital plays a crucial role in fueling the appetite for risk and growth in a capitalist economy.

One important point raised in the original article is the significance of generational workforce stability. The authors highlight the risks of an imbalanced age distribution that could create gaps in productivity capacity. While this is a general issue for societies at large, it’s essential to recognize that the factors I will discuss are more within our control as a country and can influence technology adoption and its impact on GDP growth.

Outsourcing and Its Impact on Productivity

Over the past few decades, the outsourcing of manufacturing and engineering has significantly reshaped the global economy. As companies have shifted production and technical operations to countries with lower labor costs, the direct link between technological advancements and domestic productivity has become less clear. According to the U.S. Bureau of Economic Analysis, U.S. manufacturing output as a percentage of GDP has steadily declined from around 25% in the 1960s to just 11% in recent years.

Figure 1: U.S. Manufacturing Output as a Percentage of GDP (1960-2020)

This trend suggests that while technological innovations have driven efficiency and productivity gains, these benefits are often realized in global supply chains rather than within the domestic economy. For example, a significant portion of advanced manufacturing and engineering work is now conducted in countries like China and India, where the labor force is both skilled and cost-effective.

The Role of Capital Markets in Driving Productivity

Productivity gains are often closely linked not just to the adoption of new technologies but also to the availability of robust capital markets. Strong capital markets provide businesses with the resources needed to invest in cutting-edge technologies and absorb the risks associated with innovation.

A study by the International Monetary Fund (IMF) found that countries with well-developed financial systems experienced higher rates of productivity growth compared to those with weaker financial markets. Specifically, the study showed that a 10% increase in financial development could lead to a 1.2% increase in labor productivity.

Figure 2: Correlation Between Financial Development and Productivity Growth

This correlation is evident in regions like the United States and Europe, where sophisticated financial systems allow companies to access capital for research and development, leading to innovations in AI, automation, and other technologies. As a result, these regions have seen some of the highest productivity gains globally, despite the outsourcing of many labor-intensive industries.

Statistics and Projections

Despite optimistic projections by some analysts, the actual impact of AI on productivity growth remains uncertain. Goldman Sachs predicts that AI could contribute up to a $7 trillion increase in global GDP over the next decade, with a 1.5% per year boost in U.S. productivity growth. However, other economists, such as Daron Acemoglu, suggest that the impact may be more modest, with annual productivity increases of just 0.07%.

Conclusion

In summary, while technology continues to evolve, its impact on productivity is influenced by factors such as the outsourcing of key functions and the strength of capital markets. For countries to fully realize the benefits of technological advancements, a holistic approach that includes strong domestic production capabilities and supportive financial systems is essential. The decisions we make today in these areas will shape the future of our economy and our ability to harness the true potential of technology for sustainable growth.