Productivity Growth is Lagging

WHY IS THIS IMPORTANT? The growth in productivity (defined as the value of goods and services produced per hour of work) and, by extension, per capita incomes, is the most important measure and determinant of economic performance. It is this measure, as opposed to the value of the stock market, the rate of inflation, or the trade balance, that determines the real standard of living of Americans. A return to the more robust productivity growth of the 1960s and early 1970s would make it easier for the federal government to pay off the national debt, finance social security, reduce poverty, lower taxes, and invest in health care, education and training, and other social needs.

THE TREND: The trend is not good. Productivity and per capita GDP growth rates have slowed significantly since the 1960s to less than 1.²⁵ percent per year in the 1980s and 1990s. At this rate it will take until the year 2024 to increase our per capita standard of living 50 percent and until 2047 to double it. While some of this slowdown is a statistical by-product of the difficulty of measuring productivity in the New Economy, there is no doubt that a significant share of it reflects a real productivity slowdown. Almost all of the slowdown has been in the service sector where the application of efficiency-enhancing technology has been more difficult.25 In the last few years, both productivity and wage growth have been stronger, but it is too early to tell if this portends a shift to a new growth period. Restoring productivity growth to higher levels is one of the central economic challenges in the New Economy.

Lagging productivity goes a long way towards explaining slow wage growth. If productivity had increased after 1973 the way it did in the 30 years before, half of all American households would now be earning at least $63,000, instead of the current $37,000. If annual productivity growth rates increased 1 percent faster from now until the year 2025, the median American household income would be $17,000 more per year than if growth continues at its current pace. Some have argued that it is not slow productivity growth that has caused wage growth to lag, but rather high corporate profits, which come at the expense of wage growth. But if profits had increased at the same rate as wages, and the difference was paid out in the form of higher wages, real wages would have gone up a mere four percent more between 1978 and 1997 (20 percent instead of 16 percent). The major reason for the slowdown in wage growth for the average American has been a combination of very slow productivity growth and uneven distribution of wages, particularly in the 1980s. (Wages of college-educated workers have grown while wages of less-educated workers have remained stagnant.)

THE DATA:

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