What’s surprising about the disappointing slowdown in productivity is that, by all outward signs, it ought to be booming. Productivity is economic jargon for efficiency, and robust productivity growth is the engine of higher living standards. We routinely associate faster productivity with major technology advances (the steam engine, electricity, jet travel), but higher productivity also results from competition (stronger firms displace weaker rivals) and better-educated workers (they can handle tougher tasks).
There’s no doubt that the growth of U.S. labor productivity — as measured by output per hour worked — has slowed dramatically. Since 2010, it has averaged 0.7 percent annually, according to Jason Furman, chairman of the White House Council of Economic Advisers. That’s less than one-third the average annual rate of 2.3 percent from 1948 to 2007.
Nor is there much doubt that, if continued, poor productivity gains bode ill. Beyond semi-stagnant living standards, a slow-growing economy also squeezes tax revenue. There is an intensifying collision between private and public wants. It is harder to reduce government budget deficits or pay for added public services.
What’s especially baffling is that, superficially, outside forces seem to favor faster productivity growth. Consider: First, the Internet, which promises cheaper ways to deliver goods and services. Next, “activist” investors, who push corporate managers to cut waste and lower costs. Finally, there is globalization, which means that more companies and laboratories — in China, India, Brazil and other “emerging markets” — are adding to scientific and technological knowledge.
None of this seems to matter.
Just the opposite: The productivity slump is worldwide. So says a new report from the Organization for Economic Cooperation and Development (OECD). The study compared the annual growth rates for labor productivity in 32 countries for two periods, 1995-2004 and 2004-2013. Every country but one (Spain) had slower productivity growth in the second decade than in the first. Some examples: Canada, from 1.3 percent to 0.6 percent; France from 1.5 percent to 0.6 percent; Germany, from 1.5 percent to 0.8 percent; Japan, from 1.8 percent to 0.9 percent. (In this comparison, the United States went from 2.2 percent to 1.0 percent.)
Some economists — most prominently Robert Gordon of Northwestern University and Tyler Cowen of George Mason University — attribute the productivity slump to a falloff in technological innovation. The Internet’s big gains have passed, and they’re not being replicated.
The OECD study doubts this theory. Instead, it finds that innovation remains strong at advanced companies, with productivity often running at an annual rate of 3.5 percent or more. The real problem is “a slowing of the pace at which innovations spread throughout the economy: a breakdown of the diffusion machine.” But OECD can’t explain why. It might be that the sluggish recovery from the global financial crisis made firms more cautious. However, the OECD rejects this, too, arguing that the productivity slowdown preceded the 2008 crisis.
By contrast, White House economist Furman thinks the financial crisis played a larger role. Commenting on the OECD study, he contended that the weak recovery has deterred companies from investing in more advanced machinery and buildings. Less investment means that workers are less productive, but Furman suggests that the lackluster investment will disappear once the economy fully recovers. He attributes about half the U.S. productivity slowdown to lethargic investment and says the same is true of Germany, Japan and Canada (but not France, Italy and the United Kingdom).
There’s a joker in this debate: The economic statistics underlying the productivity calculations may be flawed. Economist Joseph Carson of AllianceBernstein, a research firm, argues just that, echoing many other economists. How do you measure the output of service sectors such as health care and banking? The value of new products — say, smartphones — may also be underestimated. If the economy’s output is seriously undercounted, then the productivity statistics will be, too. There’s little agreement on whether or how much this has increased over time.
The productivity bust is a big story. It’s also a bit of a mystery.
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