Updated June 30, 2021
Introduction to U.S. Economy: Productivity
What Is Productivity?
Gaps in the data available to BLS also complicate the
Productivity is broadly defined as the ratio of outputs to
measurement of labor inputs. The primary source of labor
inputs. With respect to the economy, productivity measures
data only includes figures for total number of employees
how efficiently goods and services can be produced by
and average weekly hours of production and
comparing the amount of economic output with the amount
nonsupervisory workers. BLS has to estimate the number of
of inputs (labor, capital, etc.) used to produce those goods.
hours worked by nonproduction and supervisory workers.
Policymakers are interested in productivity because
Additionally, labor hour data for the self-employed and
productivity growth is generally the most consequential
unpaid family workers must be forecasted from IRS data
determinant of long-term economic growth and substantive
that lags by about three years.
improvements in individual living standards.
BLS faces additional challenges when determining the
Productivity Measures
value of capital inputs for MFP. To calculate MFP, BLS
There are two prominent measures of economic
uses the total value of the services provided by productive
productivity: labor productivity (also known as output per
capital in the economy, rather than the amount of physical
hour) and multifactor productivity (also known as total
capital. BLS uses a number of assumptions to first
factor productivity), both of which are produced by the
determine the level of productive capital in the economy by
Bureau of Labor Statistics (BLS).
applying depreciation schedules to physical capital based
on its age. Then BLS must determine the value of the
Labor productivity is defined as the ratio of real (inflation-
services provided by that level of capital. Estimates of MFP
adjusted) output per labor hour. The most commonly cited
are likely less precise than estimates of labor productivity
measure of labor productivity is for the nonfarm business
due to the additional assumptions incorporated into
sector. Nonfarm business sector output is defined as gross
estimating MFP.
domestic product excluding outputs from farms, general
government, nonprofit institutions, paid employees of
Importance of Productivity Growth
private households, and rental value of owner-occupied
Productivity growth is a primary driver of long-term
dwellings. Estimates of labor productivity, across several
economic growth and improvements in living standards. As
sectors and industries, are released quarterly by BLS.
productivity increases, society can produce more goods and
Growth in labor productivity depends upon how real output
services with the same level of resources, which, all else
and hours worked change in relation to each other and is an
equal, increases incomes and access to goods and services,
important factor in the overall economy.
including additional leisure time.
Multifactor productivity (MFP) is an alternative measure of
Policymakers are also interested because government
productivity that compares real private business sector
policies, institutions, and the regulatory environment can
output to the level of combined inputs (labor and capital)
impact productivity growth. For example, strong and
used to produce goods and services. BLS releases estimates
enforceable patent laws likely encourage companies to
of MFP annually.
invest more in research and development, which contributes
to productivity growth, because the laws enable companies
MFP, unlike labor productivity, differentiates among
to profit from their new technologies and products.
workers with respect to educational attainment and work
experience. Therefore, changes in labor force composition
Sources of Productivity Growth
that increase the workers ’ efficiency (e.g., increased work
Growth in output per hour of labor can be achieved through
experience) would not be registered as an increase in MFP,
three different sources: improvements in the quality of
but would be registered as an increase in labor productivity.
workers (i.e., human capital), increases in the level of
physical capital, and technological progress.
Measurement Complications
Measuring outputs and inputs, and thus productivity,
Human Capital
involve challenges. Adjusting nominal output figures for
Improvements in the abilities and efficiency of individual
inflation can be complicated, especially during periods of
workers, often referred to as increases in human capital,
rapid technological progress when the introduction of new
allow each individual worker to produce more goods and
products and services and improvements in their quality
services per hour, and therefore increase labor productivity.
complicate measuring inflation. Depending on the
Increases in human capital generally result from increased
construction of the price index, estimates of real output may
education, work experience, on-the-job training, and so on.
understate or overstate actual real output.
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Introduction to U.S. Economy: Productivity
Physical Capital
average annual growth rates of labor productivity and
Increases in the level of physical capital (machines,
multifactor productivity between 1949 and 2020 were 2.3%
factories, etc.) available to workers will also result in
and 1.2%, respectively, as shown 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 depends on investment
A number of hypotheses have been proposed to explain the
spending on new physical capital and how quickly physical
recent downturn in productivity growth. Some have argued
capital is worn out or depreciates. When investment
that the current slowdown is simply a return to 1974-1995
spending on new capital exceeds the depreciation of old
productivity growth rates after s ignificant gains in
capital, the total amount of physical capital in the economy
productivity as a result of the information technology
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 hardest to measure source of productivity growth.
productivity growth has returned to a slower pace.
Technological progress in this sense is a broad term that
includes 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 can be less obvious than those that
example, the advent of smartphones allows individuals to
fuel improvements in human and physical capital. One
carry a computer with them at all times, but the productivity
source of technological progress is research and
gains achieved through this technology are likely smaller
development, which economists understand to be one of the
than the productivity gains from the widespread availability
main drivers of technological breakthroughs.
of the first computers in the workplace. Some observers
disagree that innovation is providing smaller gains and
Productivity Slowdown
instead argue that innovative firms have not been able to
scale up to take advantage of their innovations, resulting in
Figure 1. Private Business Sector Labor Productivity
lower productivity growth within these firms’ sectors. A
and Multifactor Productivity Growth
new wave of discoveries with more direct impacts on
(Four-Year Moving Average)
productivity could reverse the slowdown; however, the
likelihood of this occurring is unknown.
Other observers are more optimistic, suggesting that the
current slowdown is a temporary phenomenon resulting
from lingering after effects of the financial crisis or the
tendency of innovation to come in waves. Still others
suggest that there is no productivity slowdown, and rather
the changing nature of the economy has rendered
productivity measures les s 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.
For example, free calls through Skype may replace long-
Notes: The value for each year represents the four-year average
distance phone service. If a larger share of goods and
centered on the final year of that period. For example, the value for
services is now being provided for free through the internet,
2015 represents the average growth rate for the January 2011 to
output growth may understate gains in wellbeing.
January 2015 period. Orange and Blue dashed lines represent average
growth between 1949 and 2020 for output per hour and multifactor
Other explanations for the slowdown in productivity growth
productivity, respectively.
include barriers to competition and unequal educational and
work opportunities. The slowdown is likely a result of
In recent years, measures of productivity growth have
several of the abovementioned factors in combination.
slowed significantly compared to previous periods in
However, these factors only partially explain some of the
history. As shown in Figure 1, average growth rates for
concentrated productivity growth slowdown at the industry
both labor productivity and MFP have generally been in
level.
decline since the mid-2000s, although average labor
productivity has increased somewhat since 2017 but
(Note: This In Focus was originally authored by Jeffrey
remains below its long-term average. Output per hour since
Stupak, former CRS Analyst in Macroeconomic Policy.)
the end of the Great Recession has grown at an average
pace of 1.1% per year (2010-2020). Additionally, MFP has
grown at an average annual rate of 0.25% since the end of
Lida R. Weinstock, Analyst in Macroeconomic Policy
the Great Recession (2010-2020). For comparison, the
IF10557
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Introduction to U.S. Economy: Productivity


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