FACT OF THE WEEK: The Productivity Puzzle

By at 14 December, 2016, 12:51 pm

Productivity Concept.

Policy plays a huge role in improving productivity growth

The U.S. Bureau of Labor Statistics released an updated look at third quarter productivity earlier this month. Nonfarm business labor productivity actually rose at an annualized rate of 3.1 percent in the third quarter. This likely lines up as another occasional blip up in a quarter here and there, while the past decade overall has been a story of poor productivity growth.

So, why should we care?

The Importance of Productivity Growth

As explained in SBE Council’s recent Gap Analysis #4: The Productivity Shortfall:

“Quite simply, compensation is tied strongly to productivity. Private-sector investment boosts labor productivity, and feeds into economic growth and compensation growth, including, of course, income. Indeed, the link between productivity and earnings cannot be ignored. More productive workers are in demand, and in turns, they can demand higher compensation. To link it back to one’s own career, the more valuable, that is, the more productive, you make yourself in the marketplace, the greater your market compensation. Higher output per worker means higher earnings in a competitive market. This explains earnings differences between individuals, and between workers in different nations. U.S. workers rank among the highest earners in the world because they are among the most productive workers.”

The U.S. Bureau of Labor Statistics has produced a nice introductory video titled “What is Productivity?” (To view the video, click the image below.)

It follows that productivity is not just about worker compensation. As indicated in the video, enhanced worker productivity means a more productive and efficient business, which ties directly into profits. Indeed, any small business owner will not hesitate to make an investment that makes her workers more productive, and thereby enhances the enterprise’s opportunities and competitiveness.

The Productivity Trend Has Been Poor

Again, though, the productivity story over the past decade has been rather grim. The SBE Council Gap report “shows the dramatic slowdown in productivity growth in recent years. That has been particularly the case since 2011. But one can also make the case that it’s been going on since 2006, with only 2009 and 2010 showing strong productivity growth as rather unique reflections of the recession and significant job losses, including reduced hours worked.”

The numbers are quite striking. For example, over the period from 1956 to 2016 (average for the first three quarters), annual productivity growth averaged 2.0 percent. These rates of growth make clear how poor productivity growth has been in recent years – averaging a mere 1.3 percent from 2007 to 2016, and a woeful 0.6 percent from 2011 to 2016.

The Steps Toward Improved Productivity

So, how do we get productivity moving? Well, given the second SBE Council Gap Analysis showing a lost decade of private investment, poor productivity growth should come as no surprise, and it is in fact stepped up private sector investment that is clearly needed to generate a long-term reacceleration in productivity growth.

Looking at the policy agenda of the incoming Trump administration, carrying through on substantive tax and regulatory relief and reform would be essential parts of building a foundation upon which entrepreneurship, investment, productivity, income and economic growth can flourish. For example, among the positive concepts in Trump’s regulatory agenda that would play a potential role in boosting productivity are the following:

• “Ask all Department heads to submit a list of every wasteful and unnecessary regulation which kills jobs, and which does not improve public safety, and eliminate them.”

• “Reform the entire regulatory code to ensure that we keep jobs and wealth in America.”

• “Issue a temporary moratorium on new agency regulations that are not compelled by Congress or public safety in order to give our American companies the certainty they need to reinvest in our community, get cash off of the sidelines, start hiring again, and expanding businesses. We will no longer regulate our companies and our jobs out of existence.”

• “Cancel immediately all illegal and overreaching executive orders.”

• “Eliminate our most intrusive regulations, like the Waters of The U.S. Rule. We will also scrap the EPA’s so-called Clean Power Plan which the government estimates will cost $7.2 billion a year.”

In the end, again, productivity is reliant on private investment. It’s essential that government roadblocks to private sector investment be removed, so that enhanced investment can spur new businesses, innovation, efficiencies, technological change, and productivity forward.

Raymond J. Keating, Chief Economist


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