Is remote work a disaster for productivity? Only if you ignore total factor productivity, Goldman says

It’s not hard to find a white-collar CEO bemoaning the era of flexible work, insisting that workers located somewhere other than the office are less focused, less productive, and generally the reason for poor financial results. Goldman Sachs’ David Solomon has long insisted that any gesture in favor of flexibility is an “aberration”. JPMorgan Chase Jamie Dimon insists remote workers can simply work elsewhere, and Amazon Andy Jassy warned anti-office workers that things “probably won’t work out for you” if they don’t change their minds. Plus, Jassy added, almost every CEO of major companies agrees with him.

Some of the top economists in academia and even on Wall Street say it may be too harsh. Thomas Philipponeconomist at New York University, argued in a widely read Paper 2022 that the modern workforce has been dragging its feet, so to speak, slowly but continuously since the industrial revolution. It comes down to a concept called “total factor productivity,” which describes the growth that a company or nation can achieve without adding to its workforce or capital. In other words, work smarter, not harder.

A recent report from Goldman Sachs, authored by a team led by chief economist Jan Hatzius, supports Philippon’s assertion, pointing out that productivity growth has either stalled or declined over the past five years . No, it’s not because of remote work, rapid executive turnover, or any other modern predicament. “Trend productivity growth simply tends to decline over time,” the analysts write.

Rather than productivity increasing exponentially with newer, more advanced technologies, the situation actually tends to gradually balance out. According to Goldman, the slow flow model rather than the exponential model “helps explain some, but not all, of the underperformance of productivity growth over the past 15 years relative to the historical average at long term “. It’s the ultimate big, if it’s truebecause Philippon looked at hundreds of years of data, dating back to 1890, shortly after the Industrial Revolution.

All that being said, will bosses change their minds about the merits of in-person work?

The productivity paradox is about more than where you work or what technology you use.

Philippon argues that contrary to the decades-old assumption that total factor productivity (TFP) grows exponentially as human ingenuity develops, it actually grows linearly. He literally looked at data going back hundreds of years, using UK TFP data from 1600 to 1914 and US TFP data from 1890 to the present. If true, it’s both good and bad news.

The good news is that the faltering TFP growth rate, instead of the warning of plummeting innovation that most economists see, looks more like business as usual. As long as annual TFP increases remain high, slow growth rates are no reason for managers to panic or blame any modern trend, such as labor flexibility or job switching. The bad news, of course, is that economics has been going on for literally hundreds of years, without a few big bangs.

Goldman analysts tend to agree. And they add: Beyond barely staying level, workers actually slow down. “The historical average TFP growth rate is not a good baseline forecast for future TFP growth: it is too optimistic,” they write. “Instead, we should expect TFP growth to slow over time. » This, they say, goes some way to explaining the past 15 years of underperforming productivity growth.

Goldman Sachs Productivity ChartGoldman Sachs Productivity Chart
Decline in productivity, according to the Goldman Sachs table

Goldman Sachs

Generative AI could actually undermine Philippon’s argument, they write, noting that productivity gains from AI adoption “could more than offset the underlying slowdown in growth over the course of time.” over the next 10 to 20 years. However, Hatzius warns that this is “possible but very premature”.

Many bosses who are throwing their weight (and money) behind AI adoption in their workplaces certainly hope this is true. This is doubly so if they think workers are simply working less hard. Earlier this year, according to EY-Parthenon research and data from the Bureau of Labor Statistics, the United States experienced five consecutive quarters of year-over-year productivity declines for the first time since 1948. Gregory Daco, chief economist for EY-Parthenon, said Fortune at the time that the drop in productivity came partly from remote work, but not entirely. “From our customers across industries, we are hearing similar stories of reduced productivity due to the new work environment,” he said.

But people also worked more hours (meaning higher labor utilization) while producing barely more work, resulting in lower overall productivity.

“When you have an environment where production outpaces labor force growth, that’s an environment of higher productivity,” Daco said. “Conversely, when output growth is slow but labor force growth is strong, we find ourselves in a low productivity environment. »

What if generative AI was the real deal?

Goldman’s Hatzius gives himself some leeway by noting a flaw in Philippon’s argument: just because TFP does not grow exponentially does not mean it must grow linearly. He agrees with Philippon that “transformative new technologies with far-reaching effects on the economy, such as electricity,” have emerged from time to time and ushered in new periods of faster productivity growth.

Another reason given by Daco to justify a substantial drop in turnover and churn rate; as a persistent impact of Great resignation and soft resignations, many workers began leaving their jobs after short periods, without feeling any sense of loyalty. “Because people were changing jobs regularly, there wasn’t much chance of getting them up to the pace or productivity that a previous worker would have had,” Daco said.

However, “the whole idea of ​​remote working and flexible working is to enable people to be more productive.” To this end, a recent report from think tank Economist Impact found that flexible working is not actually to blame for workers’ loss of focus, but rather for lack of employee choice and “weak infrastructure for a thriving workplace.”

So even if a hybrid arrangement stands the test of time, workers who shift to the office are likely to reap the most rewards. “We will likely see more weight toward three to four days in the office, rather than one or two, if the job market slows,” Daco said in May.

This is probably bad news for workers who have maintained for a long time that they are just as productive, if not more, at home. But Philippon’s conclusions, reinforced by the Goldman Sachs note, should provide a solid source of comfort and a forceful rebuttal to a pro-office boss: Humans have become progressively less productive since Eli Whitney started the gin. cotton – why, even with rapid progress in AI, would that change now?

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