First Quarter Productivity Declines

By at 5 May, 2017, 6:58 am

by Raymond J. Keating-

Productivity took a dive in the first quarter of this year, continuing a historic, extended period of grossly under-performing productivity growth.

Nonfarm business sector labor productivity (as the Bureau of Labor Statistics notes, productivity is output per hour, “calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers”) dropped by an annualized rate of 0.6 percent in the first quarter.

That followed on productivity growth of a mere 0.2 for 2016. In fact, productivity growth has failed to reach even 1 percent in each of the last six years. And over the period of 2006 to 2016, annual productivity growth averaged a woeful 1.2 percent. That’s about half the average 2.3 percent rate prevailing from 1950 to 2005. (See more on productivity in SBE Council’s August 2016 report titled “Gap Analysis #4: The Productivity Shortfall.”)

Sources and Results of Productivity Growth

It’s critical to understand key sources and results of productivity growth.

Productivity is driven forward by investment, efficiency gains, specialization, and innovation. The key results of increased productivity are increased incomes for workers as well as enhanced earnings for businesses.

So, it’s no surprise that poor private investment over the past decade and troubling levels of entrepreneurship (see SBE Council’s report Gap Analysis #2: A Lost Decade for Private Investment,” “Small Business Week 2017: The State of Entrepreneurship and Small Business) have resulted in poor productivity growth, which in turn has led to stagnating wages and incomes.

Looking ahead, elected officials need to be focused on improving the policy environment for entrepreneurship and private-sector investment via, for example, tax and regulatory reform and relief. Such relief will incentivize investment and entrepreneurship, which in turn will spur productivity and income growth.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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