Can America Turn a Productivity Boom into a Boom?

Kevin Rezvani came of age in the kitchen: he spent summers in his grandfather's bakery in Japan, did work study in his university's cafeteria and worked for years as a chef in mid-sized restaurants, along with some assignments in fast food.

In his late 20s, the biggest lesson Mr. Rezvani learned from his experience working in all kinds of food was the industry's widespread inability to reconcile the art of a kitchen and the science of a restaurant with the math of a restaurant. company.

Too many businesses, he says, aren't profitable enough to justify all the hours managers and employees need to stay afloat, let alone grow. In other words, they fall short in terms of productivity.

“There's a very fine line between doing good and doing well in this industry,” says Mr. Rezvani, now 36. “And if you're doing well, it's not worth your time.”

A few years after graduating, he and two partners opened a casual restaurant near Rutgers University. But in early 2020, they split due to personal and business differences, leaving him on his own.

To pay bills, he worked for a moving company and made deliveries for Amazon, which boomed during the lockdowns as people idle at home spent their disposable income buying goods.

Those types of companies, Mr. Rezvani noted, are frugal, frugal and strict when it comes to the number of machines or labor hours required per order. Looking for a second chance to open a restaurant, he made maximizing output his North Star: “I thought, 'I've got to make this whole thing more efficient.' At the end of the day, it is a business.”

In early 2021, he spotted a restaurant space for lease on East Seventh Street in Manhattan's East Village neighborhood. The landlord, desperate for tenants after the pandemic shutdown, gave him and his new partner a discount. They had to scream to pay the deposit, but they believed in their bet.

“I maxed out my credit card,” Mr. Rezvani said. “And it hit.”

With a minimalist menu, wall square footage and a limited number of ingredients and products, 7th Street Burger opened in May and took off quickly. From 40 employees 16 months ago, it has grown into a chain with 330 employees spread over 13 locations and plans for national expansion.

Some of the city's more upscale, full-service restaurants, with long lists of overhead costs, a fluctuating workforce and a range of rarely chosen menu options, make “$200 an hour” in sales, Mr. Rezvani argues. But on a good day he can make $2,000 an hour “with three guys on the grill, three items on my menu, nine ingredients in my restaurant.”

“We are an ATM,” Mr. Rezvani said.

Looking for a win-win situation

7th Street is the kind of success story that exemplifies the nascent productivity explosion the U.S. economy has experienced over the past year, after taking a dive in 2021 and 2022.

Economists typically measure productivity as a simple ratio: the total amount of output an economy produces per hour worked by its labor force. On that basis, productivity will increase by 2.7 percent in 2023, according to the Bureau of Labor Statistics over the past two quarters Growth more than doubled between 2005 and 2019.

On a less technical level, productivity can generally be explained by the old axiom about “doing more with less,” or the folk virtue of “getting the biggest bang for your buck.”

Economists often sigh with relief when they see a productivity gain, because this presents a potential win-win situation for employees, customers and business owners: if companies can make as much or more money in fewer working hours, then – according to standard economic logic – they can make more earn per hour, reinvest in operations and pay employees a little more without sacrificing profitability (or leaning on price increases to boost profits).

As Joseph Brusuelas and Tuan Nguyen, economists at the consultancy RSM, wrote in a note in late January: “The rise in US productivity over the past year, if sustained, is a potential game changer for the economy that that mythical upward trend represents. a tide that raises the standard of living for everyone.”

In recent history, the give and take between productivity gains and wage increases has been uneven. Many economic models suggest that as workers begin to double their daily or hourly output, they will likely be paid about twice as much as before. From 1979 to 2022, however productivity grew by more than four times the inflation-adjusted 14.8 percent growth in the compensation of average non-supervisory private sector workers, who make up roughly eight in 10 people in the labor force.

Yet productivity has acted like a secret sauce so far in this cycle, allowing the other ingredients of what analysts have called a “soft landing” to coexist: slowing inflation, robust economic growth, strong wage growth and unemployment that has almost reached a record low.

“The pandemic-induced labor shortages caused many companies to think about how to use labor more efficiently,” said Dean Baker, an economist at the Center for Economic and Policy Research, a labor-focused think tank in Washington. “So I'm going to be a productivity optimist for the first time in my life.”

A growing number of companies in the financial and manufacturing sectors and transport logistics offer digital tools that – even without avant-garde AI features – seem to offer the promise of working 'smarter, not harder' and reducing work.

Ycharts, a company founded in 2009, sells a platform where users visualize complex financial market data and then create sleek, customizable charts and portfolios. Following recent updates, the company reported that its clients at financial advisory firms had saved an average of more than a dozen hours per week from the busy work of data analysis.

Since 2021, there has also been a rapid overall shift toward belt-tightening by businesses, in response to higher financing costs due to higher interest rates or to an expected slowdown in sales. And that has had consequences for a whole range of investors and entrepreneurs who were part of the increase in company formations that started in 2020.

“There is more pressure than ever on companies to become profitable as quickly as possible,” says Katie Tyson, 37, founder of Hive Brands, a new online retailer that curates, researches and sells food and wellness products from sustainable brands.

Although she calls Hive “a child of the pandemic,” having launched in 2020 when borrowing was still ultra-cheap, “we have been very cost-conscious, I think the startups of the 2010s were not,” she says. Tyson added. “It is no longer growth at all costs.”

Companies also appear to be responding more quickly to changing consumer habits. A greater emphasis on delivery and takeout orders, for example, have increased profit margins at many food companies. Retail analysts report that better-targeted advertising and the growth of e-commerce have helped businesses large and small. And proponents of hybrid and remote work options argue that these models are reducing wasted hours commuting And help executives make the most of a talent pool regardless of location.

Fruits of a tight labor market

Productivity data can be misleading. Its core calculation—output per hour—worked best when America was an industrial and agricultural society, producing mostly bushels of wheat or nuts and bolts for industrial goods, versus the harder-to-quantify service-oriented consumption that makes up most of today's economy . .

The data can be especially misleading when measured over short periods of time.

For example, did the entire US economy really do that? become 20 percent more productive in the second quarter of 2020 on an annual basis, as a reading of the data would suggest? Or was it just that within a few months millions of workers were laid off while the economy contracted only slightly, making the simplistic ratio of output per worker look better in a false way?

Apparent leaps in efficiency can also be missing from official data or lag behind for years. In 1987, Nobel laureate Robert Solow noted that “you can see the computer age everywhere except in productivity statistics.” (There was a brief increase in the numbers late 1990s and early 2000s before disappearing.)

In 2016, Google's chief economist Hal Varian told Bloomberg: “We're certainly not measuring productivity well, but we didn't measure it right before either. So are we doing a worse job measuring productivity than we used to? I think there are some arguments that this is the case.”

Looking ahead, a number of market analysts say that a crucial variable in the overall productivity improvement to date has been an unemployment rate that is near record lows.

Peter Williams, economist and director at 22V Research, an investment strategy and quantitative analytics firm, wrote in a recent note that “companies are forced to innovate and adapt in an environment of tight labor markets.” He added that for many companies, relying on “cheap labor and cheap capital is not really an option anymore.”

When a company needs all hands on deck to maintain revenue, using layoffs to improve the bottom line can have the opposite effect. Instead, improving efficiency rather than reducing headcount often becomes the better growth engine or competitive advantage.

Keeping productivity growth at near current rates may require efficiency gains from AI technology and continued curbs on inflation, though some Wall Street analysts are confident both can happen.

For some labor economists – who have seen a return on investment for shareholders and entrepreneurs most of the productivity gains of recent decades while wage gains fell – the most important question in the near future is whether employees will be able to get a bigger share of the pie this time.

Kathryn Anne Edwards, an economic policy advisor and deputy at the RAND Corporation, worries that future productivity gains can be largely attributed to technological innovations rather than worker input or ability, putting pressure on average wage growth, which has recently risen appears.

“Wages are determined by power or productivity,” Ms. Edwards said. “The low wages that so many workers earn are based on the idea that people get paid for the value they bring. And how exactly is that value measured?”