America’s Productivity Problem

Would you like a raise? How about more vacation? Of course you would. If you’re anything like me, one of your main motivations each day at the office is the prospect of advancing, making more money, or even earning more time off to spend on the things outside your career that matter.

The main factor that makes any of this possible is rising worker productivity. The more efficiently we do our jobs, the more our employers can justify paying us — be it in salary or leisure. And one of the economy’s main weaknesses of late has been a decline in the growth of labor productivity, a dynamic that might help explain the plight of the average American worker in recent years.

On Friday, the Labor Department announced that labor productivity rose at just 0.9% in the second quarter of this year, after falling 1.7% in the first quarter. And these numbers aren’t an anomaly: According to a report issued last week by JPMorgan Chase economists Michael Feroli and Robert Mellman, worker productivity has only grown at an annual rate of 0.7% in the past three years, after averaging 2.9% growth from 1995 to 2005.

And as Feroli and Mellman point out — and as TIME’s Rana Foroohar noted earlier this year when the JPMorgan economists identified this dynamic in a report called “Is I.T. Over?” – the decrease in productivity growth began even before the recession, and has coincided with a slowdown in technological growth, as measured by the pace in which computer equipment has become more affordable in recent years. According to the report, “Over the past few years the real price of information-processing equipment and software has declined at the slowest pace in more than a generation.”

So why does this change in the pace of technological advance matter? Economists believe one of the main factors that drive worker productivity is technology. As a firm invests in new technologies like new computers, software or high-speed internet, it enables its workers to get jobs done more efficiently. Over the past generation, we have seen an incredible decline in the price of high-tech equipment, which has driven much of our economic growth over that time period — especially during the boom years of the 1990s.

What the most recent numbers regarding prices of IT equipment imply is that the efficiency gains brought by the digital revolution may be petering out, and that will have a direct effect on our ability to become more efficient workers. And if we want to get back to the worker-productivity gains we were experiencing a decade ago, we need to somehow figure out how to encourage the kind of technological innovation that has led to previous waves of sharp productivity growth.

Of course, this raises the age-old question that economists have been arguing over for generations: What causes innovation? Conservative economists tend to believe that innovation is spawned mainly by the ingenuity of entrepreneurs. They rely on what is known as Say’s law, named after the classical economist Jean-Baptiste Say, which states that “supply creates its own demand.” When Steve Jobs designed the iPhone, for instance, there was no demand for the product. It’s creation created the demand for the product, which is now significant. Since the iPhone was launched in 2007, the smartphone market has exploded, and businesses across the world have invested in these products so that their workers can be constantly connected and work more efficiently. In this worldview, the entrepreneur is the instigator of growth, and therefore we must do what we can to avoid dampening his incentive to create.

But the entrepreneur isn’t the only source of productivity growth. Firms can simply invest more in existing technology, intellectual property, and research and development. And it turns out that growth of this sort of spending has slowed from an average of 4.7% per year in 1980 to 2000, to 2.8% per year over the past 10 years, according to the report.

And when you ask businesses why spending on R&D isn’t growing as quickly as it was in the past, or why business investment in general hasn’t rebounded as it did after past recessions, they say it’s because of a lack of consumer demand. And this is why liberals tend to argue for government stimulus to jolt the economy into what they believe will be a self-sustaining virtuous circle of higher demand and growth — especially during a time when interest rates are so low and therefore the cost of action small.

If you get the feeling there’s a certain familiarity to this argument, you’re right. The debate over why productivity growth has slowed echoes many of the political debates going on right now, with one side stressing the ingenuity of the producer class, while the other emphasizes the health of the consumer class. Ideally, an economy would have a risk-taking entrepreneurial class and a healthy and confident consumer class. Right now we have neither, and we’re not quite sure which ought to come first.

When working from home just doesn't work

 Once a year, leaders of Community Options come together from its 35 locations for a retreat. The nonprofit organization runs a variety of entrepreneurial ventures that create job opportunities and provide housing for people with disabilities.

At the most recent summit, the chief financial officer was bemoaning the wasted flowers at the organization's New Brunswick, N.J. floral store, due to the inevitable difficulty in managing inventory to meet customer orders.

Listening in, a graphic designer from Community Options' Daily Plan It, which rents shared office space and provides support services such as document shredding, thought they could use the dead, unsold flowers to create potpourri. As a result, Community Options is now launching a line of potpourri, which will be packaged and sold by people with disabilities.

"It's all because a group of people got together and came up with this idea," says Robert Stack, founder and chief executive of Princeton, N.J.-based Community Options. "People play off each other."

In a world of video conferencing, cloud computing, and shared online workspaces, it's easy to imagine that people can work together from anywhere, just as if they were sitting in the cubicle next door.

It's true that telework reduces pollution, improves productivity, and cuts real estate costs for employers while increasing retention and employee loyalty. But no matter how advanced the technology, something is lost when face-to-face contact disappears.

Indeed, a new report found that the number of teleworkers declined in 2010 for the first time since data collection began nearly a decade ago. While there's no denying that telecommuting can provide tremendous benefits, organizations are finding that virtual collaboration has its limits.

"We've tried the cloud stuff; it's good. We've tried the Skype where you have four or five people on the screen. It ain't the same thing," says Community Options' Stack, who holds quarterly in-person meetings for each region in addition to the annual summit. "Collaboration and cross-pollination of ideas doesn't happen by me sending you an email and you sending one back."

When face time trumps convenience

WorldatWork, a human resources association, found that the number of people who telecommuted at least one day a month in 2010 dropped to 26.2 million, down from 33.7 million in 2008, in a report released earlier this year. Even with the drop, teleworkers represent 20% of the working adult population.

WorldatWork argues that the uncertain economy has heightened employees' fears that they risk losing their job if they are not seen. "We found that teleworking went down during the most recent economic downturn, more due to a mindset than to an organization's change in policy," says Rose Stanley, work-life practice leader for WorldatWork.

To be sure, a slight majority (54%) of the decline in remote workers is attributed to a rise in unemployment levels over the past few years, according to WorldatWork's survey; the remainder was attributed to factors such as employees' fear of retribution and increased use of independent contractors by employers.

The association recommends that employees who work remotely visit their home office at least once a quarter. "You have to put in place ways for that employee to reconnect to their co-workers," Stanley says.

Peter Wride, 27, understands well the limits of telecommuting. He was hired to manage a sales team for an online school based in Texas -- when he was based in Utah. Aside from an initial week in Texas, he relied on quarterly in-person meetings with his staff and other colleagues.

"It became hard to deal with different people in the company who I was meeting for the first time over the phone," Wride recalls. "I'd show up in person and spend a week putting out fires or trying to meet people so the next time I had to call them, I had a bit of a relationship with them."

Under his leadership, his team boosted profits at the school by 200%, but he felt cut off and unfulfilled by the work experience. "I really didn't feel that I was part of the team," he says.

Inserting community into telework: No simple feat

CUNA Mutual Group is trying to solve the puzzle of how to build virtual teamwork. The company, which provides financial services to credit unions, has about 70 employees across the country working in its lender development program. To help everyone get to know one other, the team uses Web cameras and encourages breakout discussions among smaller groups on topics like a Christmas memory or favorite vacation spot, says Terri Smith, director of product management.

"We take every opportunity to continue to connect our team. If we're doing a team meeting, we're all on webcams, so you're getting that face-to-face interaction," Smith says.

The webcam technology also allows a presenter to see people's faces, so she can stop a presentation to address puzzled looks. The group has celebrated life events like a baby shower or birthday by sending the individual a cookie bouquet or having everyone sing happy birthday via webcam.

State Street Corp. (STT) is trying to unite an even bigger group: its global work force. Last week, the financial services company launched a global Flex Employee Network with, naturally, virtual events for employees around the globe such as a talk about best practices in telework. The initiative is part of the company's new approach to flexible work, which includes technological support for telecommuters, online tools for tracking productivity, and the option to reserve shared office space for those days when virtual workers are on site.

State Street has found that telecommuters enjoy having more moments of serendipitous in-person connection with colleagues because when they are in the office, they may be assigned a space next to someone they previously didn't know, says Maia Germain, vice president of the Flex Program Office. But when a team was recently giving a colleague a gift for a life event, they realized they forgot to pass the collection hat to the people who were working from home. They resolved never to make that mistake again.

"We've learned a lot about virtual teams and connecting the intangible things," Germain says. "We've been able to come up with a lot of needs we'll be focusing on in 2012."

Some jobs cannot be done from home

People who work three days at home are very productive on those days, but they value even more the ability to interact with colleagues in person when they come to the office. Nonetheless, "some of the jobs really, truly can't be done at home. Certain financial services roles can only be done with technology that only exists within the organization," she says.

When telework isn't possible, employers should find other ways to be flexible with their workers, Stanley suggests. State Street, for instance, offers five types of flexible work arrangements: flex time (your daily work schedule is flexible), flex place (where you work is flexible), compressed workweeks, reduced hours, and job sharing (you split the job duties with a partner).

Stark agrees: "Flexibility is worth more than money if you want to land the best person for a position."