Productivity Boom: How Automation is Reshaping the US Economy
In a small town in Indiana, Batesville Tool & Die faced a challenge in finding enough workers to meet customer demand. With big-name manufacturers nearby, attracting factory workers was no easy task. The CEO, Jody Fledderman, described it as “crazy” due to the scarcity of job seekers in the town. However, the company found a solution in automation. By investing in machines that could mimic human workers and vision systems to enhance their capabilities, Batesville Tool & Die was able to fill some of its vacancies.
This experience is not unique to Batesville Tool & Die. Across the United States, many companies have turned to automation and advanced technology to address chronic worker shortages. By training existing workers to use these technologies and investing in machines to perform tasks that are difficult to find people for, companies have experienced an unexpected productivity boom. This boom has played a significant role in the US economy’s ability to remain healthy, with strong growth and low unemployment, despite high interest rates intended to control inflation.
To economists, this surge in productivity is seen as a magical elixir for the economy. When companies adopt more efficient machines and technology, their workers become more productive, resulting in increased output per hour. This allows companies to boost profits and raise employee pay without raising prices, thus keeping inflation in check. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, compared this productivity growth to “magic beanstalk beans for the economy,” enabling faster income increases, wage growth, and GDP without generating inflation.
The last time the US experienced such a productivity surge was in the late 1990s when the sudden adoption of laptops, cellphones, and the internet led to increased productivity. This surge allowed the Federal Reserve to keep borrowing rates low while maintaining control over inflation. Similarly, the current productivity boom has helped cool inflation from a four-decade high of 9.1% to 3.1%, despite the Fed’s aggressive streak of rate hikes.
The productivity boom can be attributed to the greater efficiencies achieved by companies like Batesville Tool & Die. Before this surge, average hourly pay could only rise by 3.5% annually for inflation to stay within the Fed’s 2% target. However, higher productivity has changed this equation, allowing for elevated wage growth without igniting inflation. The pressure on businesses to raise prices has been offset by strong productivity growth.
Federal Reserve Chair Jerome Powell acknowledged the role of higher productivity in the economy’s steady growth and declining inflation. He also expressed optimism that productivity gains can continue. Many economists and business people believe that artificial intelligence (AI) will play a significant role in sustaining these gains. While AI is currently seen as an assistant and accelerator in certain roles, its potential is still being explored. Early evidence suggests that AI can increase productivity, with a study showing that customer-support agents using an AI-based assistant were 14% more productive than their colleagues.
Automation often raises concerns about job displacement, but history has shown that technological improvements create more jobs than they destroy in the long run. People are needed to build, upgrade, repair, and operate sophisticated machines. Additionally, some displaced workers can transition into these new roles, which is facilitated by the retirement of the baby boomer generation, leading to labor shortages.
Some of the productivity gains in recent years can also be attributed to more satisfied workers. The tight labor markets allowed Americans to change jobs and find better-paying and more fulfilling positions. For example, Justin Thompson, a former police officer, found a new job as an operations manager at a charter airline. His experience in the Marine Corps and the use of technology in his new role have made him more productive and happier.
Overall, the productivity boom driven by automation and advanced technology has reshaped the US economy. It has allowed companies to meet customer demand, boost profits, and raise wages without causing inflation. With the potential for further advancements in AI and technology, the productivity gains are expected to continue, creating a more efficient and prosperous economy.
