“Productivity is one of the most important yet least understood areas of economics. Over long periods, it is the only pathway toward higher levels of prosperity; the reason an American worker makes much more today than a century ago is that each hour of labor produces much more in goods and services.” (Neil Irwin, Why Is Productivity So Weak? Three Theories, April 28, 2016)

In terms of shedding some light on why productivity growth was even worse after the 2009-10 financial meltdown, James Manyika and Myron Scholes* reviewed the 2010-2014 data.

Their study suggests that there were three key contributing causal factors.

The main factors include unusually low growth in capital investment among the advanced economies, the spread of digitization, and unusually weak economic recoveries from the Great Recession.

Here is some of the evidence which supports their conclusion.

1. In the 2000-2004 period, capital intensity in the US grew at a compound annual rate of 3.6%. In the 2010-2014 period, it declined at a sharply lower 0.4% annual rate, the weakest performance in the postwar period.

2. They argue that the Solow Paradox has entered a new phase, where one sees digital technologies everywhere, but the new technologies has failed to fuel productivity growth.

3. The third factor that explains historically slow productivity growth is weak consumer and investment demand during the recovery phase. They point out that when the industrial economies started to recover after 2008, many industries had excess capacity and room to expand and hire without needing to invest in new equipment or structures.

In other words, weak economic demand in the recovery period resulted in historically low capital-intensity growth, which in turn was the single biggest factor behind anemic productivity growth in the 2010-2014 period.

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*Solving the Productivity Puzzle, Project Syndicate, May 9, 2018

Productivity Growth In U.S. Manufacturing Has Been Dismal Over The Past Ten Years