Productivity: Is The Boom Over?

Dean Baker

While it may sound like an obscure detail for eco­nom­ics nerds, the Depart­ment of Labor’s lat­est data on pro­duc­tiv­i­ty growth should be caus­ing a greater stir, because it is huge­ly impor­tant for the econ­o­my and people’s lives. 

It is too early to pronounce the end of the '90s growth spurt, but it is certainly not too early to be concerned.

In the mid-’90s, the rate of pro­duc­tiv­i­ty growth unex­pect­ed­ly jumped from 1.5 per­cent a year to more than 2.5 per­cent year, where it stayed until the mid­dle of 2004. But since then, the new data show that pro­duc­tiv­i­ty growth has dropped back down to just a 1.5 per­cent annu­al rate. It is too ear­ly to pro­nounce the end of the 90s growth spurt, but it is cer­tain­ly not too ear­ly to be concerned. 

Pro­duc­tiv­i­ty growth is the main long-run deter­mi­nant of liv­ing stan­dards. It mea­sures the val­ue of goods and ser­vices pro­duced in an hour of work. If pro­duc­tiv­i­ty increas­es rapid­ly, then work­ers can enjoy sub­stan­tial and sus­tained gains in liv­ing stan­dards. This can mean more goods and ser­vices (includ­ing items like health care and edu­ca­tion) and it can also mean more leisure, so that work­ers can sus­tain the same liv­ing stan­dard even as they work few­er hours. More rapid pro­duc­tiv­i­ty growth also makes it eas­i­er to address prob­lems like glob­al warm­ing, since an econ­o­my with rapid pro­duc­tiv­i­ty growth can more eas­i­ly divert resources toward reduc­ing green­house gas emis­sions while still rais­ing stan­dards of living. 

For these rea­sons, we should be very con­cerned about the rate of pro­duc­tiv­i­ty growth. While dis­tri­b­u­tion is extreme­ly impor­tant – at a point in time, more for Bill Gates means less for every­one else – it is a lot eas­i­er to accom­plish almost any goal (includ­ing redis­trib­ut­ing income) in the con­text of rapid­ly ris­ing productivity.

It would be eas­i­er to gauge the course of future pro­duc­tiv­i­ty growth if econ­o­mists had a bet­ter idea of what caused it. How­ev­er, the two big changes in pro­duc­tiv­i­ty growth trends in the post-war peri­od both caught econ­o­mists by surprise.

In 1973, the rate of pro­duc­tiv­i­ty growth slowed sharply, after a quar­ter-cen­tu­ry of rapid growth. Even today, there is no wide­ly accept­ed expla­na­tion for this slow­down. And when the econ­o­my upturned in 1995, econ­o­mists also had no expla­na­tion. While every­one knows that com­put­ers and infor­ma­tion tech­nol­o­gy were cen­tral in this boom, com­put­ers (even PCs) had been around for decades with­out hav­ing any mea­sur­able impact on pro­duc­tiv­i­ty growth. It is not clear why com­put­ers sud­den­ly led to a pro­duc­tiv­i­ty boom at that time.

Since we don’t know what caused the upturn, there is not much basis for say­ing if and when we should expect the burst of pro­duc­tiv­i­ty to come to an end. But we can cer­tain­ly spec­u­late on some fac­tors that could play a role.

At the top of my list is the fast mon­ey game being played on Wall Street with hedge funds and oth­er forms of cre­ative finance, which can have neg­a­tive effects on pro­duc­tiv­i­ty growth for two rea­sons. First, eco­nom­ic the­o­ry tells us that work­ers will respond to incen­tives, which means that many high­ly edu­cat­ed peo­ple are run­ning to careers on Wall Street in pur­suit of mul­ti-mil­lion dol­lar pay­checks, instead of careers in com­put­ers, engi­neer­ing, med­i­cine and oth­er pro­duc­tive areas. And sec­ond, many of the buy­outs may be struc­tured pri­mar­i­ly with the goal of gen­er­at­ing fees for agents rather than cre­at­ing viable pro­duc­tive com­pa­nies. We’ll know more about how these deals turn out after the next reces­sion, but any­one who thinks that the high-rollers always know what they’re doing need only think of Time-Warn­er. The world’s largest media com­pa­ny sold itself for AOL stock at the peak of the Inter­net bub­ble. In a cou­ple of years, the AOL stock was almost worth­less, which meant that Time-Warn­er had sold itself for almost nothing. 

There are oth­er poten­tial vil­lains on the pro­duc­tiv­i­ty front. Divert­ing resources to the mil­i­tary drains them from pro­duc­tive uses. Sim­i­lar­ly, our patent financed sys­tems of drug and soft­ware devel­op­ment are huge­ly inef­fi­cient. And of course, leav­ing much of our pop­u­la­tion poor­ly edu­cat­ed and lock­ing up more than 2 mil­lion peo­ple in prison doesn’t help pro­duc­tiv­i­ty either. 

Rais­ing pro­duc­tiv­i­ty growth is not easy, and at this point the data do not yet clear­ly show that we have a prob­lem. How­ev­er, the stretch of slow pro­duc­tiv­i­ty growth has per­sist­ed long enough that it should be get­ting seri­ous attention. 

Dean Bak­er is co-direc­tor of the Cen­ter for Eco­nom­ic and Pol­i­cy Research and co-author of Social Secu­ri­ty: The Pho­ny Cri­sis (Uni­ver­si­ty of Chica­go Press, 2000).
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