The US Productivity Slowdown After 2005

In the long run, a rising standard of living is all about productivity growth. When the average person in a country produces more per hour worked, then it becomes possible for the average person to consume more per hour worked. Yes, there is a meaningful and necessary role for redistribution to the needy. But the main reason why societies get rich is by redistributing more: rather, societies are able to redistribute more because rising productivity expands the size of the overall pie. 

In the latest issue of the Monthly Labor Review from the US Bureau of Labor Statistics, Shawn Sprague provides an overview in "The U.S. productivity slowdown: an economy-wide and industry-level analysis" (April 2021). In particular, he is focused on the slowdown in US productivity growth since 2005, after a resurgence of productivity growth in the previous decade. Here's a figure showing the longer-run patterns, which have birthed roughly a jillion research papers. 

(Click on image to enlarge)

Notice that total productivity growth is robust in the decades after World War II, from 1948 to 1973. Then there is a productivity slowdown, especially severe in the stagflationary 1970s, but continuing through the 1980s and into the 1990s. There's a productivity surge from 1997 to 2005, commonly attributed to acceleration in the power and deployment of computing and information technology. But just when it seemed as if the economy might be moving back to a higher sustained rate of productivity growth, then starting around 2005, productivity sagged back to the levels of the slowdown in the 1970s and 1980s.

The figure also shows how economists break down sources of economic growth. First look at how much the quality of the labor force has improved, as measured by education and experience. Then look at how much capital the average worker is using on the job. After calculating how much productivity growth can be explained by those two factors, what is left over is called "multifactor productivity growth." This is often interpreted as changes in technology--broadly understood to include not just new inventions but all the ways that production can be improved. But as the economist Moses Abramowitz said years ago, measuring multifactor productivity growth as what is left over, after accounting for other factors, means that productivity growth is "the measure of our ignorance."

As Sprague points out, variations in multifactor productivity growth are the biggest part of changes in productivity over time. 

The deceleration in MFP growth—the largest contributor to the slowdown—explains 65 percent of the slowdown relative to the speedup period; it also explains 79 percent of the sluggishness relative to the long-term historical average rate. The massive deceleration in MFP growth is also emblematic of a broader phenomenon shown in figure 2. We can see that throughout the historical period since WWII, the majority of the variation in labor productivity growth from one period to the next was from underlying variation in MFP growth, rather than from the other two components.
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