|
Issues In Focus. Outlook for Labor Productivity Growth The AEO2004 reference case economic forecast is a projection of possible economic growth, from the short term to the longer term, in a consistent framework that stresses demand factors in the short term and supply factors in the long term [33]. Productivity is perhaps the most important concept for the determination of employment, inflation, and supply of output in the long term. Productivity is a measure of economic efficiency that shows how effectively economic inputs are converted into output. Advances in productivity—that is, the ability to produce more with the same or less input—are a significant source of increased potential national income. The U.S. economy has been able to produce more goods and services over time, not only by requiring a proportional increase of labor time but also by making production more efficient. To illustrate the importance of productivity improvements, on the eve of the American Revolution, U.S. gross domestic product (GDP) per capita stood at approximately $765 (in 1992 dollars) [34]. Incomes rose dramatically over the next two centuries, propelled upward by the Industrial Revolution, and by 2002 GDP per capita had grown to $30,000 (1992 dollars). Productivity improvements played a major role in the increase in per capita GDP growth. Productivity is measured by comparing the amount of goods and services produced with the inputs used in production:
The U.S. Department of Labor, Bureau of Labor Statistics (BLS), is responsible for developing official productivity statistics for the United States. BLS publishes four sets of productivity measures for major sectors and subsectors of the U.S. economy:
In the AEO2004 reference case, productivity growth in the nonfarm business sector is projected to average 2.25 percent annually from 2002 to 2025. The low and high macroeconomic growth cases project average annual growth of 1.82 percent and 2.65 percent, respectively. As discussed below, the range of productivity growth covered by the three cases is within the range of historical experience as well as what is projected for the future by various experts in the productivity field. Figure 8 shows 5-year average annual growth rates for the three cases. Estimates of Historical Productivity Growth and Their Determinants Productivity Growth up to 1995 For the period 1917-1927, labor productivity growth averaged 3.8 percent per year, the highest rate for any comparable 10-year period for the U.S. economy [36]. That productivity boom coincided with the adoption of the assembly line and the proliferation of the automobile. Broadcast radio and the electric utility industry saw strong development in the 1920s, and Lindbergh made his famous transatlantic flight, which ushered in the age of aviation. Slow productivity growth in the 1927-1948 period accompanied the Great Depression and World War II. After the war, two factors combined to boost productivity growth: first, output had dropped so far during the Great Depression that simply returning to trend growth required a period of faster economic growth; second, the economy benefited from a wave of innovations, including the building of the interstate highway system, the discovery of transistors, and the emergence of commercial aviation. Between 1948 and 1973, annual labor productivity growth averaged 2.8 percent.
Productivity growth began to slump again in the early 1970s. Higher oil prices undoubtedly played a role in slowing output during the 1970s, but when oil prices returned to pre-1973 levels during the 1980s (in real dollar terms), productivity continued to sag. Other possible explanations include a slower rate of innovations, slower growth of workers’ skills, and increased government regulation. Martin N. Baily has estimated the contributions to nonfarm labor productivity (output per hour) coming from increases in capital per hour worked and labor quality over the period 1948-1995 [37]. The “unexplained residual,” also termed multifactor productivity (MFP), is defined as the difference between total productivity growth and the contributions from these two factors. Neither capital per hour nor labor quality explains the slowdown in labor productivity in the 1973-1995 period, leaving the explanation or lack thereof to the “unexplained residual” (Table 4). Interestingly, although the contributions from capital per hour did not differ by much between the pre-1973 and post-1973 periods, the contributions from information technology capital rose in the later period, while the contributions from other capital fell. Information Technology and the Productivity Growth of the Late 1990s
Numerous studies have attempted to explain the increase in labor productivity from the 1973-95 period to the post-1995 period. The conclusions of Steven Oliner and Daniel Sichel, the 2001 Economic Report of the President, and Dale Jorgenson, Mun Ho, and Kevin Stiroh [38] were summarized by Baily (Table 5). Although the three studies used slightly different data to support their analyses, there are fundamental similarities in their conclusions. As in Baily’s analysis of the earlier time period, information technology was the largest single identifiable factor contributing to labor productivity growth after 1945. The boost to productivity from information technology more than offset the drag on productivity from other capital. In each of the three studies, the majority of the acceleration in labor productivity growth in the post-1995 period was assigned to the residual (or MFP) effect: 0.8 percent to 0.9 percent of the estimated 1.2-percent and 1.4-percent increases in labor productivity (nonfarm business sector) in the first two studies and 0.5 percent of the estimated 0.9-percent increase in labor productivity (business sector) in the third analysis. In the studies by Oliner and Sichel and Jorgenson, Ho, and Stiroh, more than one-half of the MFP effect was attributed to the computer sector. The 2001 Economic Report of the President suggested, however, that most of the increase came from outside the computer sector. Meyer, Baily, and others see the bunching of productivity-enhancing innovations working in combination with a favorable U.S. economic environment to boost productivity. In Baily’s words, “rapid advances in computing power, software and communications capabilities formed a set of powerful complementary innovations.” An increasingly deregulated U.S. economy created a highly competitive environment that drove out inefficiencies, displaced low-productivity firms with high-productivity ones, and forced the adoption of new innovations in order to survive. While the new innovations were available globally, the highly competitive environment may explain why U.S. productivity rates benefited more from them than did other world economies. And finally, globalization expanded markets and increased international competition, further raising the productivity of U.S. firms. More recently, Stiroh has found that the recent productivity revival is broad-based, with nearly two-thirds of the 61 industries in his analysis showing accelerating productivity gains [39]. Furthermore, Stiroh found that productivity growth was higher in industries that either produced information technologies or used them intensively. Thus, Stiroh’s industry analysis supports the conclusion that information technology capital was a significant contributor to the post-1995 productivity surge. Future Outlook for Productivity Growth The issue of productivity growth is very important for the future economic growth of any nation. For the United States this issue has given rise, understandably, to a significant amount of empirical literature that has investigated the determinants of productivity growth in the past and the future. The AEO2004 projections for productivity growth lie within the range of historical experience and of the future expectations published by experts, as described below.
Most researchers who have studied the issue and prognosticated about the future outlook have an expectation that annual labor productivity growth will be above 2 percent for the next decade or so. Table 6 shows estimates from recent studies of projected growth in labor productivity. The list represents most of the well-known researchers in the productivity field. All the point estimates of future annual labor productivity growth shown in Table 6 are 2.0 percent or higher, and the estimated ranges fall between a low of 1.3 percent and a high of 3.0 percent. The key question in developing the AEO2004 reference case forecast was whether the recent surge in productivity growth would continue. The majority view of the productivity experts cited here is that strong growth in labor productivity will continue for several more years. For example, the U.C. Berkeley economist J. Bradford DeLong writes: “Will this new, higher level of productivity growth persist? The answer appears likely to be ‘yes.’ The most standard of simple applicable growth models . . . predicts that the social return to information technology investment would have to suddenly and discontinuously drop to zero for the upward jump in productivity growth to reverse itself in the near future. More sophisticated models that focus in more detail on the determinants of investment spending or on the sources of increased total factor productivity appear to strengthen, not weaken, forecasts of productivity growth over the next decade” [40]. Naysayers about the productivity revival include Steven Roach and Robert Gordon. Roach believes that much of the post-1995 productivity revival is a statistical illusion resulting from the lack of a satisfactory measure of productivity in the white collar services sector. Gordon argues that the role of information technology has been overstated, and that other factors influencing productivity growth—such as the international and domestic economic environment and fiscal and monetary policies—led to the strong trend in recent years. Regardless of his views about the role of technology in productivity growth, Gordon’s expectation is that productivity will soon return to its trend growth rate of 2.25 percent [41].
Released: January 2004 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
