Productivity is the relationship between inputs and output – in other words, how efficiently a business turns raw materials, capital etc into goods or services.
Inputs are a function of a number of variables. Specifically, two are in scope for the innovation argument: human capital and labour bottlenecks.
Human capital is a broad term for the knowledge and skills possessed by individuals in the labour force. It captures more qualitative attributes than commonly used measures of activity such as the number of hours worked. By integrating human capital into their productivity frameworks, analysts can account for the value added by employees’ learning, development and experience.
Labour bottlenecks can prevent companies from accessing sufficient human capital. They are caused by both acute and structural issues. Demographics shape the labour force – countries grow richer, their populations become more educated, average fertility declines and life expectancy rises. As populations age, the proportion of retirees increases with each generation, leaving a smaller pool of workers for companies to recruit from. Long-term illness, ‘quiet quitting’ and employees opting for early retirement since the pandemic have all contributed to a tighter labour market.
Throughout 2022, we saw evidence of these bottlenecks in our meetings with companies, as many management teams said a shortage of labour supply was impeding growth.