Introduction to U.S. Economy: Productivity

Introduction to U.S. Economy: Productivity

Updated January 3, 2023
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 output 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
Likewise, increases in the capital stock would boost labor
physical capital, and technological progress.
productivity but not MFP.
Human Capital
Measurement Complications
Improvements in the abilities and efficiency of individual
Measuring outputs and inputs, and thus productivity,
workers, often referred to as increases in human capital,
involve challenges. Adjusting nominal output figures for
allow each individual worker to produce more goods and
inflation can be complicated, especially during periods of
services per hour, and therefore increase labor productivity.
rapid technological progress when the introduction of new
Increases in human capital generally result from increased
products and services and improvements in their quality
education, work experience, on-the-job training, and so on.
complicate measuring inflation. Depending on the
construction of the price index, estimates of real output may
understate or overstate actual real output.
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Introduction to U.S. Economy: Productivity
Physical Capital
average annual rate of 0.53% since the end of the Great
Increases in the level of physical capital (machines,
Recession (2010-2021). For comparison, the average annual
factories, etc.) available to workers also result in
growth rates of labor productivity and multifactor
productivity growth. Physical capital complements labor,
productivity between 1949 and 2021 were 2.3% and 1.2%,
allowing it to produce goods and services faster. The level
respectively, as shown in Figure 1.
of physical capital in the economy depends on investment
spending on new physical capital and how quickly physical
Potential Causes
capital is worn out. When investment spending on new
A number of hypotheses have been proposed to explain the
capital exceeds the depreciation of old capital, the total
recent downturn in productivity growth. Some have argued
amount of physical capital in the economy increases.
that the current slowdown is simply a return to 1974-1995
productivity growth rates after significant gains in
Technological Progress
productivity as a result of the information technology
Technological progress is potentially the most important
revolution of the 1990s. According to this view, firms
and hardest to measure source of productivity growth.
reorganized and incorporated these new technologies,
Technological progress in this sense is a broad term that
resulting in a spike in productivity growth, but now that
includes not only new and more efficient technologies, but
these technologies have been fully incorporated
also new production processes and organizational structures
productivity growth has returned to a slower pace.
for companies. The underlying drivers and policies that fuel
technological progress can be less obvious than those that
Another possible explanation suggests a decline in new
fuel improvements in human and physical capital. One
technologies and innovations that substantively improve
source of technological progress is research and
productivity, compared to previous discoveries. For
development, which economists understand to be one of the
example, the advent of smartphones allows individuals to
main drivers of technological breakthroughs.
carry a computer with them at all times, but the productivity
gains achieved through this technology are likely smaller
Productivity Slowdown
than the productivity gains from the widespread availability
of the first computers in the workplace. Some observers
Figure 1. Private Business Sector Labor Productivity
disagree that innovation is providing smaller gains and
and Multifactor Productivity Growth
instead argue that innovative firms have not been able to
(Four-Year Moving Average)
scale up to take advantage of their innovations, resulting in
lower productivity growth within these firms’ sectors. A
new wave of discoveries with more direct impacts on
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 less accurate. This view contends
that the current productivity measures are less able to

Source: CRS calculations using data from Bureau of Labor Statistics.
capture productivity gains from advances in digital goods
and services. Issues arise because many goods and services
Notes: The value for each year represents the four-year average
that individuals once paid for are now provided for free
centered on the final year of that period. For example, the value for
through the internet, which affects estimates of total output.
2015 represents the average growth rate for the January 2011 to
For example, free calls through videoconferencing
January 2015 period. Orange and Blue dashed lines represent average
applications may replace long-distance phone service. If a
growth between 1949 and 2021 for output per hour and multifactor
larger share of goods and services is now being provided
productivity, respectively.
for free through the internet, output growth may understate
gains in wellbeing.
In recent years, measures of productivity growth have
slowed significantly compared to previous periods in
Other explanations for the slowdown in productivity growth
history. As shown in Figure 1, average growth rates for
include barriers to competition and unequal educational and
both labor productivity and MFP have generally been in
work opportunities. The slowdown is likely a result of
decline since the mid-2000s, although average labor
several factors in combination. However, these factors only
productivity has increased somewhat since 2017 and rose
partially explain some of the concentrated productivity
above its long-term average in 2021 (although it fell in the
growth slowdown at the industry level.
first three quarters of 2022). Productivity growth has been
fairly volatile in the wake of the COVID-19 pandemic, and
(Note: This In Focus was originally authored by Jeffrey
it may take several years to parse what effects the crisis had
Stupak, former CRS Analyst in Macroeconomic Policy.)
on productivity trends. Output per hour since the end of the
Great Recession has grown at an average pace of 1.5% per
year (2010-2021). Additionally, MFP has grown at an
Lida R. Weinstock, Analyst Macroeconomic Policy
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Introduction to U.S. Economy: Productivity

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