Worry About Slow Productivity Growth, Not Fast Productivity Growth

U.S. productivity growth is stagnating, and if the trend continues it could have a drastic impact on the U.S. economy. Without increasing productivity, the only way for a country to get richer is by working more or borrowing more. Furthermore, productivity is a crucial part of international competitiveness, because it is only by increasing our productivity that we can compete with other countries on cost.

A recent BLS news release does a good job of showing the worrying trends. Productivity growth has been abnormally low since approximately 2006, plummeting through the Great Recession, recovering slightly immediately afterward, and slowing considerably since 2010.

The first graph below (Chart 1) provides historical context back to 2000. There is a clear decline in labor productivity (the dark blue line) and also multifactor productivity (light blue). These are the two most common ways of understanding output growth: labor productivity estimates how much each worker produces and multifactor productivity tells us how much each worker and unit of capital can together invest.

Looking back a bit further in time, the next graph (Chart 2) estimates the amount that different factors contributed to total productivity growth. The period between 1987 and 1995 was a period of similarly slow growth.

The bar chart makes it look like 1995-2007 was something of an anomaly in our recent era. Such an assessment is not far from the mark. Labor productivity growth over that period averaged 2.1 percent (or 2.4 percent from 1995-2005), even though since 1970 labor productivity growth has averaged only 1.6 percent per year. Multifactor productivity gains are the largest driver of overall productivity between 1995 and 2007. MFP gains, like labor productivity growth overall, have been weak since then. We need these high growth periods to balance out the low-growth periods and maintain increases in our standard of living.

Even though high productivity growth is so important and has been associated with the most successful economic boom in recent history, over the past few years a completely different concern has begun to grip the popular imagination: that high productivity growth hurts the economy by destroying jobs. Images of robots kicking workers to the curb are alarming, but also misleading. Technology has a far more nuanced relationship to employment than that.

The simplest comparison between productivity and employment makes it clear that productivity is not to blame for job loss for two reasons. First, despite the obvious potential for automation to replace workers at individual jobs and in individual industries, there is no connection between productivity and unemployment in the United States or other countries over the past 50 years. This is because productivity increases overall economic activity and creates other jobs in the medium term.

And second, we are obviously not living in anything like a world where robots are taking all our jobs. Labor productivity is a measure of how much we produce with a given amount of labor, and if our workers were getting more productive (e.g. some of their jobs were being automated away and therefore the remaining workers were producing more) it would show up as rising productivity. As this post has tried to explain, far from accelerating, productivity growth has been slow during the recent period of high employment.

The logic of the unemployment-productivity relationship is clear. Productivity growth is the way out of our current malaise, not the cause of it. We therefore need policies that encourage productivity growth, instead of discouraging it. Worries about the short-term disruptive effects of technological change need to target policies ameliorating those negative effects, not slow down or halt the technological change altogether. And since government plays an active role in facilitating productivity growth, it is imperative that we don't let any our ambivalence for technological change get in the way of the right growth policies.

While many cling to the idea that government can do no right or that markets are always the best solution, public policy has a vitally important role in encouraging and stimulating economic growth. There is much that government can do to increase the pace of technological change: public R&D funding for basic research has been directly responsible for many fundamental breakthroughs since WWII, and tax policy encouraging R&D has been proven to increase private R&D spending. The patent and intellectual property system has an enormous impact on whether and how companies pursue innovation, and the regulatory environment can make or break attempts to innovate.

These publicly-determined factors combine with market forces and existing technologies to determine how and how fast productivity happens. Productivity has been called “manna from heaven,” but it’s much more like a slow-growing crop that must be planted and tended, and can only be harvested years down the road. When investments in productivity do come to fruition, however, there are substantial benefits for economic growth and these benefits spill over into healthier labor markets. We need to get past our knee-jerk fears of automation and continue to encourage innovation and productivity growth.