Productivity and Investments in AI and the Metaverse

By SBE Council at 9 November, 2023, 12:19 am

by Raymond J. Keating –

The U.S. economy finally saw a solid quarter on the labor productivity front in the third quarter of 2023, according to the latest productivity report from the U.S. Bureau of Labor Statistics.

Nonfarm business labor productivity grew by a robust 4.7 percent in the third quarter (at an annual rate). Labor productivity, by the way, is measured by “dividing an index of real output by an index of hours worked by all workers, including employees, proprietors, and unpaid family workers.”

The third quarter productivity number was welcome because it hit the productivity sweet spot, if you will, as both output and hours worked increased, and the growth in output ran well ahead of hours worked, i.e., +5.9 percent versus +1.1 percent, respectively.

In comparison, while nonfarm labor productivity grew by 3.6 percent in the second quarter, output grew by 2.0 percent, but hours worked declined by 1.5 percent. And for all of 2022, nonfarm labor productivity growth registered -1.9 percent, which included +2.1 percent in output but +4.0 percent in hour worked.

A Sluggish History of Growth

Looking over the longer run, the U.S. has faced sluggish productivity growth since the Great Recession. During the post-WWII period, nonfarm labor productivity grew at an average annual rate of 2.1 percent, and from 1947 to 2006, the average was 2.3 percent. However, from 2007 to 2022, nonfarm labor productivity averaged only 1.5 percent.

Productivity, of course, is essential to economic growth, the earnings of workers, and the profitability of businesses. And productivity growth depends upon the private investment that drives entrepreneurship and innovation, including technological advancements.

But while recent years have been challenging on the productivity and economic growth fronts, innovations in an assortment of arenas have made positive contributions to productivity, and that promises to be the case as we look ahead (that is, as long as entrepreneurship and investment aren’t undercut by misguided and costly tax, regulatory, trade and government spending policies, for example).

AI’s Productivity Power

Advancements in artificial intelligence (AI) and metaverse technologies and applications promise to serve as real boosts to labor productivity.

Indeed, this already is well under way, as illustrated in SBE Council’s “Small Business AI Adoption Survey 2023.” That survey found that small business investment in AI resulted in hours saved or better utilized by both small business owners and their employees. Specifically, small business owners reported a median weekly savings of 13 employee hours due to AI tools, and 13 hours of their own time saved.

Investments and developments in such technologies as AI and the metaverse already have generated significant gains. Based on its survey results, SBE Council conservatively estimated 6.33 billion hours in owner and employee time saved or better utilized, which translated into an estimated savings of $273.5 billion annually. This is scratching the surface of potential productivity gains from investments and innovations in these and other technologies.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.