Theoretically, there is no single variable more important to the economy than productivity, or output per worker. Productivity growth is how we get improved living standards over time. Faster productivity helps to offset the impact of wage growth, supporting gains in corporate profits. However, in practice, the productivity estimate is among the most troublesome of economic statistics. Productivity growth has slowed over the last week, in the U.S. and worldwide. Efforts to boost productivity growth should be a priority, as improvement would help to counter slower growth in the workforce.
Productivity weakened in the preliminary estimate for 3Q19, down at a 0.3% annual rate (+1.4% y/y). Quarterly figures are quirky and subject to large revisions. However, the underlying trend remains low (a 1.0% annual rate over the last four years). The slowdown in productivity growth is also seen outside of the U.S. and is believed to be associated with a weaker trend in capital spending (also seen outside the U.S.). The slowdown in productivity growth is more pronounced in manufacturing (-0.1% y/y and a +0.3% average over the last four years). This is in contrast to previous decades, when gains in the manufacturing sector outpaced overall productivity growth by a wide margin.
In the 1980s, the rule of thumb was that we would lose one out of ten manufacturing jobs each year, but that job would be replaced by a new job. The U.S. shed low-productivity jobs in areas like textiles and apparel, and grew jobs in higher-end industries, like technology. In the late 1990s, production of new technologies (cell phones, networking equipment, and the internet) boosted overall output per worker. By the early 2000s, these new technologies led to efficiency gains. Firms could produce more with fewer workers. Following the 2001 recession, we didn’t just have a jobless recovery – we had a job loss recovery (we didn’t begin to add jobs until nearly two years after the recession had ended).
Increased trade with China had a significant impact on manufacturing jobs since the turn of the century. However, technology also played a part. The turnover in manufacturing jobs is now about half of what it was in the 1990s. Looking ahead, advances in robotics and artificial intelligence should limit job growth in manufacturing (although there will always be some degree of flux – creation and destruction – over time).
So, how do we boost productivity growth? Efforts to lift capital investment should be a priority. Academic research indicates that cuts in the corporate tax rate are more likely to show up as share buybacks and dividend increases than higher business investment – and that was reinforced by what we saw over the last year. Lowering the corporate tax rate means that the after-tax cost of business investment is greater. Government can help boost productivity growth over the long term by providing greater support for research and development, but that’s not happening.