Updated November 12, 2019
Introduction to U.S. Economy: Productivity
What Is Productivity?
produce estimates of real output can be complicated. This is
Productivity is broadly defined as the ratio of outputs to
especially true during periods of rapid technological
inputs. With respect to the economy, productivity measures
progress where the introduction of new products and
how efficiently goods and services can be produced by
services and improvements in their quality complicate
comparing the amount of economic output with the amount
measuring inflation. Depending on the construction of the
of inputs (labor, capital, etc.) used to produce those goods.
price index, estimates of real output may understate or
overstate actual real output.
Productivity Measures
There are two prominent measures of economic
Gaps in the data available to BLS also complicate the
productivity: labor productivity (also known as output per
measurement of labor inputs. The primary source of labor
hour) and multifactor productivity (also known as total
data only includes figures for total number of employees
factor productivity), both of which are produced by the
and average weekly hours of production and
Bureau of Labor Statistics (BLS) in the United States.
nonsupervisory workers. BLS then has to estimate the
number of hours worked by nonproduction and supervisory
Labor productivity is defined as the ratio of the real
workers. Additionally, labor hour data for the self-
(inflation-adjusted) value of output from the business sector
employed and unpaid family workers must be forecasted
to the total number of hours worked, or real output per labor
from IRS data that lags by about three years.
hour, as shown below. Business sector output is defined as
gross domestic product excluding outputs from general
BLS faces additional challenges when determining the
government, nonprofit institutions, paid employees of
value of capital inputs for MFP. To calculate MFP, BLS
private households, and rental value of owner-occupied
uses the total value of the services provided by productive
dwellings. Estimates of labor productivity are released
capital in the economy, rather than the amount of physical
quarterly by BLS. BLS also produces a nonfarm business
capital. BLS uses a number of assumptions to first
labor productivity measure that further excludes output
determine the level of productive capital in the economy by
from the farm sector. Growth in labor productivity can be
applying depreciation schedules to physical capital based
estimated by calculating the difference between growth in
on its age. Then BLS must determine the value of the
real output and growth in hours worked.
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.


Importance of Productivity Growth
Multifactor productivity (MFP) is an alternative measure of
Policymakers are interested in productivity because
productivity that compares real private business sector
productivity growth is generally the most consequential
output to the level of combined inputs (labor and capital)
determinant of long-term economic growth and substantive
used to produce goods and services. More specifically,
improvements in individual living standards. As
MFP actually measures the portion of output that is
productivity increases, society can produce more goods and
unexplained by the value of inputs, providing a sense of
services with the same level of resources, which increases
how efficiently firms are using and combining inputs in the
incomes and access to goods and services, including
production process. Estimates of MFP are released annually
additional leisure time.
by the BLS. BLS also produces a private nonfarm business
measure of MFP that further excludes output from the farm
Policymakers are also interested because government
sector.
policies, institutions, and the regulatory environment can
impact productivity growth. For example, strong and
MFP, unlike labor productivity, differentiates among
enforceable patent laws likely encourage companies to
workers with respect to educational attainment and work
invest more in research and development because the laws
experience. Therefore, changes in labor force composition
enable companies to profit from their new technologies and
that increase the workers’ efficiency (e.g., increased work
products.
experience) would not be registered as an 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.
and inputs. Adjusting nominal output figures for inflation to
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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 Great
allow each individual worker to produce more goods and
Recession has grown at an average pace of 0.77% per year
services per hour, and therefore increase labor productivity.
(2010 to 2018). Additionally, MFP has grown at an average
Increases in human capital generally result from increased
annual rate of 0.34% since the end of the Great Recession
education, work experience, on-the-job training, and so on.
(2010 to 2018). For comparison, the average annual growth
rates of labor productivity and multifactor productivity
Physical Capital
between 1949 and 2018 were 2.3% and 1.2%, respectively,
Increases in the level of physical capital (machines,
as shown in Figure 1.
factories, etc.) available to workers will also result in
productivity growth. Physical capital complements labor,
Potential Causes
allowing it to produce goods and services faster. The level
A number of hypotheses have been proposed to explain the
of physical capital in the economy depends on investment
recent downturn in productivity growth. Some have argued
spending on new physical capital and how quickly physical
that the current slowdown is simply a return to 1974-1995
capital is worn out or depreciates. When investment
productivity growth rates after significant gains in
spending on new capital exceeds the depreciation of old
productivity as a result of the information technology
capital, the total amount of physical capital in the economy
revolution of the 1990s. According to this view, firms
increases.
reorganized and incorporated these new technologies,
resulting in a spike in productivity growth, but now that
Technological Progress
these technologies have been fully incorporated
Technological progress is potentially the most important
productivity growth has returned to a slower pace.
and least understood source of productivity growth.
Technological progress in this sense is a broad term that
Another possible explanation suggests a decline in new
includes not only new and more efficient technologies, but
technologies and innovations that substantively improve
also new production processes and organizational structures
productivity, compared to previous discoveries. For
for companies. The underlying drivers and policies that fuel
example, the advent of smartphones allows individuals to
technological progress are the least understood, compared
carry a computer with them at all times, but the productivity
to human and physical capital. One source of technological
gains achieved through this technology are likely smaller
progress is research and development, which is one of the
than the productivity gains from the advent of internal
main drivers of technological breakthroughs.
combustion engines. Alternatively, a new wave of
discoveries with more direct impacts on productivity could
Productivity Slowdown
erase the slowdown; however, the likelihood of this
occurring is unknown.
Figure 1. Private Business Sector Labor Productivity
and Multifactor Productivity Growth
Others are more optimistic, suggesting that the current
(Five-Year Moving Average)
slowdown is a temporary phenomenon resulting from the
financial crisis. During the 2007-2009 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 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 is now being provided for free through the internet,
period. Orange and Blue dashed lines represent average growth
output growth may understate gains in wellbeing.
between 1949 and 2018 for output per hour and multifactor

productivity, respectively.
Jeffrey M. Stupak, Analyst in Macroeconomic Policy
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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