America’s Growth Challenge, in 2 Charts

The following two charts, from that great McKinsey Global Institute study I mentioned earlier, do a good job of illustrating the productivity challenge facing advanced economies, including the United States. If you want to grow as fast in the future as in the past, productivity growth is key to offset a demographic headwind:

McKinsey further breaks down the growth challenge, and highlights how automation can help:

GDP growth was exceptionally brisk over the past half century, driven by the twin engines of employment growth and rising productivity. However, declining birthrates and the trend toward aging in many advanced and some emerging economies mean that peak employment will occur in most countries within 50 years. The workforce in Japan is already shrinking in size, and the total number of workers in China will start to decline within a decade. This expected decline in the share of working-age population will place the onus for future economic growth far more heavily on productivity gains. Employment growth of 1.7 percent annually between 1964 and 2014 in the G19 countries and Nigeria is set to fall to just 0.3 percent per year.

Prior MGI research has shown that even if productivity growth maintains its 1.8 percent annual rate of the past half century, the rate of GDP growth will fall by as much as 40 percent over the next 50 years. On a per capita basis, the GDP growth decline is about 19 percent). In order to compensate for slower employment growth, productivity would need to grow at a rate of 3.3 percent annually, or 80 percent faster than it has grown over the past half century.

Our analysis of the automation adoption scenarios suggests that automation could help bridge the projected growth gap caused by a deficit of full-time equivalents worldwide. Automation alone will not be sufficient to achieve long-term target growth across the world, given the decline in the working-age population and the need for high productivity to achieve that target. Especially in fast-growing countries, other measures to boost productivity will be needed. However, notably, the productivity gains from automation could suffice to at least maintain today’s GDP per capita.

Our methodology takes into account only labor substitution gains. Other performance gains—in the form of improved quality, fewer breakdowns, greater safety, and so on—would come on top of this overall productivity boost. We also assume that human labor displaced by automation would rejoin the workforce and be as productive as it was in 2014, that is, new demand for labor will be created. In some ways, this is a conservative assumption, given that if automation produces productivity gains, we assume displaced labor reenters the workforce at a lower level of productivity than the level of labor productivity at the time the displacement occurs. Others could argue that the activities performed by workers who are displaced by automation could have lower levels of economic output than the activities that had been taken over by machines. In any case, it is vital that there be new demand for labor displaced by automation.

While our estimates of the productivity boost from automation are substantial, they are of an order of magnitude comparable to major technologies that have been introduced in the past two centuries. For example, between 1850 and 1910, the steam engine has been estimated to have enabled productivity growth of 0.3 percent per annum. Analyses of the introduction of robots in manufacturing and IT estimate that they have accounted for annual productivity increases of 0.4 percent and 0.6 percent, respectively.