December 19, 2016
Introduction to U.S. Economy: Productivity
What Is Productivity?
and inputs. Adjusting nominal output figures for inflation to
Productivity is broadly defined as the ratio of outputs to
produce estimates of real output can be complicated. This is
inputs. With respect to the economy, productivity measures
especially true during periods of rapid technological
how efficiently goods and services can be produced,
progress where the introduction of new products and
comparing the amount of economic output with the amount
services and improvements in the quality of products and
of inputs (labor, capital, etc.) used to produce those goods.
services complicate measuring inflation. Depending on the
construction of the price index, estimates of real output may
Productivity Measures
understate or overstate actual real output.
There are two prominent measures of economic
productivity: labor productivity (also known as output per
Gaps in the data available to BLS also complicate the
hour) and multifactor productivity (also known as total
measurement of labor inputs. The primary source of labor
factor productivity), both of which are produced by the
data only includes figures for total number of employees,
Bureau of Labor Statistics (BLS) in the United States.
average weekly hours of production, and nonsupervisory
workers. BLS then has to estimate the number of hours
Labor productivity is defined as the ratio of the real
worked by non-production and supervisory workers.
(inflation-adjusted) value of output from the business sector
Additionally, labor hour data for the self-employed and
to the total number of hours worked, or real output per labor
unpaid family workers must be forecasted from Internal
hour, as shown below. Business sector output is defined as
Revenue Service data that lags by about three years.
gross domestic product excluding outputs from general
government, nonprofit institutions, paid employees of
BLS faces additional challenges when determining the
private households, and rental value of owner-occupied
value of capital inputs for MFP. To calculate MFP, BLS
dwellings. BLS releases estimates of labor productivity
uses the total value of the services provided by productive
quarterly. BLS also produces a non-farm business labor
capital in the economy, rather than the amount of physical
productivity measure, which further excludes output from
capital. BLS uses a number of assumptions to first
the farm sector. Growth in labor productivity can be
determine the level of productive capital in the economy by
estimated by calculating the difference between growth in
applying depreciation schedules to physical capital based
real output and growth in hours worked.
on its age. Then BLS must determine the value of the
services provided by that level of capital. Estimates of MFP
are likely less precise than estimates of labor productivity
due to the additional assumptions incorporated into
estimating MFP.
Multifactor productivity (MFP) is an alternative measure of
Importance of Productivity Growth
productivity that compares real private business sector
Policymakers are interested in productivity because
output to the level of combined inputs (labor and capital)
productivity growth is generally the most consequential
used to produce goods and services. More specifically,
determinant of long-term economic growth and substantive
MFP actually measures the portion of output that is
improvements in individual living standards. As
unexplained by the value of inputs, providing a sense of
productivity increases, society can produce more goods and
how efficiently firms are using and combining inputs in the
services with the same level of resources, which increases
production process. BLS releases estimates of MFP
incomes and access to goods and services, including
annually. BLS also produces a private non-farm business
additional leisure time.
measure of MFP, which further excludes output from the
farm sector.
Policymakers also are interested because government
policies, institutions, and the regulatory environment can
MFP, unlike labor productivity, differentiates among
impact productivity growth. For example, strong and
workers with respect to educational attainment and work
enforceable patent laws likely encourage companies to
experience. Therefore, changes in the composition of the
invest more in research and development, as the laws
labor force that increase the efficiency of workers (e.g.,
enable companies to profit from their new technologies and
increased work experience) would not be registered as an
products.
increase in MFP but would be registered as an increase in
labor productivity.
Sources of Productivity Growth
Growth in output per hour of labor can be achieved through
Measurement Complications
three different sources: improvements in the quality of
When attempting to measure productivity, a number of
workers (i.e., human capital), increases in the level of
complications arise with the measurement of both outputs
physical capital, and technological progress.
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Introduction to U.S. Economy: Productivity
Human Capital
history. As shown in Figure 1, average growth rates for
Improvements in the abilities and efficiency of individual
both labor productivity and MFP have been in decline since
workers, often referred to as increases in human capital,
the mid-2000s. Output per hour since the end of the so-
allow each individual worker to produce more goods and
called Great Recession has grown at an average pace of
services per hour and therefore increase labor productivity.
0.8% per year (third quarter of 2009 to second quarter of
Increases in human capital generally result from increased
2016). Additionally, MFP has grown at an average annual
education, work experience, on-the-job training, and so on.
rate of 0.3% since the end of the Great Recession (2010 to
2015). For comparison, the average annual growth rate of
Physical Capital
labor productivity and multifactor productivity between
Increases in the level of physical capital (machines,
1949 and 2015 were 2.3% and 1.3%, respectively, as shown
factories, etc.) available to workers also result in
in Figure 1.
productivity growth. Physical capital complements labor,
allowing it to produce goods and services faster. The level
Potential Causes
of physical capital in the economy is dependent on
A number of hypotheses have been proposed to explain the
investment spending on new physical capital and how
recent downturn in productivity growth. Some have argued
quickly physical capital is worn out or depreciates. When
that the current slowdown is simply a return to 1974-1995
investment spending on new capital exceeds the
productivity growth rates after significant gains in
depreciation of old capital, the total amount of physical
productivity as a result of the information technology
capital in the economy increases.
revolution of the 1990s. According to this view, firms
reorganized and incorporated these new technologies,
Technological Progress
resulting in a spike in productivity growth, but now that
Technological progress is potentially the most important
these technologies have been fully incorporated
and least understood source of productivity growth.
productivity growth has returned to a slower pace.
Technological progress in this sense is a broad term
including not only new and more efficient technologies but
Another possible explanation suggests a decline in new
also new production processes and organizational structures
technologies and innovations that substantively improve
for companies. The underlying drivers and policies that fuel
productivity, compared to previous discoveries. For
technological progress are the least understood, compared
example, the advent of smartphones allows individuals to
with human and physical capital. One source of
carry a computer with them at all times, but the productivity
technological progress is research and development, which
gains achieved through this technology are likely smaller
is one of the main drivers of technological breakthroughs.
than the productivity gains from the advent of internal
combustion engines. Alternatively, a new wave of
Productivity Slowdown
discoveries with more direct impacts on productivity could
erase the slowdown; however, the likelihood of this
Figure 1. Private Business Sector Labor Productivity
occurring is unknown.
and Multifactor Productivity Growth
(five-year moving average)
Others are more optimistic, suggesting that the current
slowdown is a temporary phenomenon resulting from the
financial crisis. During the Great Recession, there was a
sharp decrease in investment spending, including research
and development, by companies, which would likely slow
the rate of technological progress. According to this view,
the productivity slowdown is likely temporary and growth
will speed up as investment returns to normal.
Still others suggest that there is no productivity slowdown
and rather that the changing nature of the economy has
rendered productivity measures less accurate. This view
contends that the current productivity measures are less able
to capture productivity gains from advances in digital goods
and services. Issues arise because many goods and services
that individuals once paid for are now provided for free
Source: CRS calculations using data from Bureau of Labor Statistics.
through the Internet, which affects estimates of total output.
Notes: The value for each year represents the five-year average
For example, free calls through Skype may replace long-
centered on the final year of that period. For example, the value for
distance phone service. If a larger share of goods and
2015 represents the average growth rate for the 2011 to 2015
services are now being provided for free through the
period. Orange and Blue dashed lines represent average growth
Internet, output growth may understate gains in wellbeing.
between 1949 and 2015 for output per hour and multifactor
productivity, respectively.
Jeffrey M. Stupak, Analyst in Macroeconomic Policy
IF10557
In recent years, measures of productivity growth have
slowed significantly compared to previous periods in

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Introduction to U.S. Economy: Productivity



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