Experts have spent the year insisting that, with enough time and evidence, there’s no longer a doubt that remote work throws a wrench into productivity. Like it or not, in most industries, hybrid work is certain to remain a fixture, leaving the productivity levels of the office-only 2010s firmly in the past. But office buildings have barely crested to a half-full point this summer, per data from Kastle Systems provided exclusively to Fortune. Why, then, did the surprisingly strong second quarter include a boost in productivity as well? This is not what the remote work critics said would happen.
After five consecutive quarters of productivity declines—the longest stretch since World War II—workers initiated a stunning turnaround in the second quarter, with labor productivity spiking by 3.7% after a 1.2% slump in Q1, per a Labor Department report from Thursday. This surprised even the experts, who told Reuters they were expecting a 2% jump at most.
While output increased by 2.4%, hours worked actually decreased 1.3%, marking the first decline in hours worked in three years. (This is another point in favor of the Elon Musks of the world who insist that remote workers are kicking their feet up on company time: In the past year, workers have shaved an average of 37 minutes off their daily workday.) But more output in fewer hours worked in half-full offices is not consistent with the trend of remote work sapping productivity.
To look under the hood, Fortune talked to EY-Parthenon, the economics arm of the consulting and auditing giant, and found there could be a simple reason for this: smarter investments from the corporate sector.
Does the end of ‘easy money’ mean the end of lackluster training?
Gregory Daco, chief economist at EY-Parthenon, actually predicted the upswing last week. “In recent years, the unprecedented tightness in the labor market, historically high inflation, and waning output growth have coalesced to yield some of the poorest productivity metrics in several decades,” he wrote on X/Twitter.
He attributed the historic streak of low productivity to inflation (companies were prioritizing “value over volume”), the shift to remote work, “lackluster” capital, turnover, and rising interest rates. “The continual training and retraining of employees have sapped firm-level productivity for both those charged with training execution and those undergoing training but failing to reach the efficiency levels of their experienced counterparts,” he explained.
His colleague at EY-Parthenon, Lydia Boussour, agrees. A senior economist in the strategy and transformations division, she told Fortune that businesses are basically just spending their money better. “In an environment where the value and cost of labor have increased and the cost of capital is higher, we are seeing some businesses focusing on ways to boost labor productivity and process efficiency via greater retention efforts, long-term training programs, and the incorporation of new technologies, including generative A.I., machine learning, and quantum computing.”
Daco chalked up the resurgence in productivity that he foresaw to exactly what Boussour did: companies finally reaching their limit with low output and investing in productivity enhancement. Their best bet is to keep strong performers on board by doubling down on retention efforts, long-term training programs, and technology integration.
“Greater efficiency and productivity growth should be bolstered by employees who are well trained, have longer tenures, and have achieved equilibrium in a hybrid work environment,” Daco wrote.
What if we just keep getting more productive?
To be sure, there are other potential explanations for productivity’s big comeback. The country is in the middle of something like a 21st-century manufacturing boom, as the president campaigns on the successes of “Bidenomics,” a media portmanteau he has assumed for himself as his economic record looks much stronger with inflation falling rapidly. Simply put, the federal government is pumping billions into the economy in line with Biden’s vision of “industrial policy,” and business could be responding with a productivity jump.
There may be a technological explanation, too. Bloomberg executive editor Joe Weisenthal, cohost of the Odd Lots podcast, was stunned looking through earnings results and calls this week. He posted on X/Twitter about energy firms raising guidance because they are all just pumping more oil than they expected. “Could we be entering a golden age of tech and productivity breakthroughs?” he wondered aloud.
This also raises the question of whether the research on remote work’s productivity sag could have been just a bit hasty. This is hard to reconcile when the bombshell studies keep dropping—a recent paper found in-office work to be a staggering 18% more productive. But the sea change in corporate behavior since the pandemic is still just a few years old, and each year since 2020 has presented workers with new challenges to overcome. It just may be the case that workers will grow more productive as remote or hybrid work gets more entrenched.
As the hottest summer in 100,000 years comes to an end and the fall looms, with bosses targeting an even stricter return-to-office push, they would be advised to consider this situation fluid and ever evolving. After all, somehow the U.S. worker got more productive last quarter, largely working from home.
