Productivity is fundamental to economic growth. The U.S. economy has been able to produce more goods and services over time by making production and distribution more efficient, not simply by adding more labor time. Output per hour, the most commonly cited labor productivity statistic, cap-tures the combined effect of changes in technology, capital per worker, level of output, capacity utilization, managerial skill and many other factors.

Productivity is also crucial to profitability in wholesale distribution because employee compensation costs - salaries, commissions and benefits - represent 60%-70% of total operating expenses. As I noted in an earlier column (“The productivity imperative for wholesale distribution,” posted at http://www.pembrokeconsulting.com/insights-distrib.html and click on: The productivity imperative), distributors are at the forefront of using technology to reduce repetitive, low value-added activities, such as order processing, billing, inventory control, delivery route scheduling and warehouse management.

The table in the tint box identified as Figure 1 compares “output per hour” in wholesale with the non-farm business sector, which includes all for-profit business sectors in the U.S. economy. Productivity growth throughout the economy began accelerating in the mid-1990s. Yet, productivity growth in wholesale exceeded the overall business sector by 1.6 percentage points in the past 15 years, and by 2.5 percentage points since 2001. Note that output is adjusted for price changes, eliminating the effect of product inflation.

Figure 1: Average Annual Growth In Labor Productivity, 1991-2005

1996-2000:
Non-farm business sector = 2.5%
Wholesale trade = 5.1%

2001-2005:
Non-farm business sector = 3.3%
Wholesale trade = 5.8%

1991-2005:
Non-farm business sector = 2.5%
Wholesale trade = 4.1%

Other studies of labor productivity, using different metrics, also show that the wholesale industry has made a disproportionately large contribution to the nation's productivity. McKinsey Global Institute concluded that the wholesale sector contributed 28% of the productivity increase from 1995 to 1999. A study by economists at the Department of Commerce found that wholesale trade contributed a similar proportion of the nation's productivity growth over the longer period from 1989 to 2001. To put these results in perspective, the wholesale industry accounted for only 6% of U.S. gross domestic product during the periods studied.

Unfortunately, these studies do not identify which sub-sectors of the wholesale industry contributed to productivity growth. Therefore, we mathematically decomposed productivity growth into the exact percentage point contributions of 19 major sub-sectors within wholesale distribution during the 2001 to 2005 period. This process, called growth accounting, allows us to identify how much of the 5.8% growth in labor productivity came from each sub-sector.

The results of our analyses are shown in the tint box labeled Figure 2. Four sub-sectors accounted for nearly 70% of the 5.8% growth in labor productivity from 2001 to 2005. These four sub-sectors accounted for only 43% of the wholesale industry's sales during this period.

Data limitations prevent us from peering below this admittedly aggregated view of the industry. However, the sub-sectors making the largest contribution to productivity growth have some common characteristics: