PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

A Look at Productivity in the Second Quarter of 2017

By at 11 August, 2017, 9:46 am

by Raymond J. Keating-

Productivity in the second quarter of this year climbed at an annualized rate of 0.9 percent, which was up from a revised slight gain of 0.1 percent in the first quarter.

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”) has performed poorly for more than a decade now (other than the anomalous years of 2009 and 2010 in which productivity growth was strong coming out of the recession and with employment dropping), and continuing into this year.

Even with some upward revisions reflected in this latest Bureau of Labor Statistics report, productivity has performed poorly since 2011. From 2011 to 2016, productivity growth averaged a meager 0.6 percent, and over the period of 2006 to 2016, annual productivity growth averaged a woeful 1.2 percent. Now, over the first two quarters of 2017, productivity growth averaged 0.5 percent.

Those numbers compare to the average 2.3 percent rate prevailing from 1950 to 2005. For more on productivity, see SBE Council’s August 2016 report titled “Gap Analysis #4: The Productivity Shortfall.” As noted in that report:

“U.S. labor productivity growth has been extremely poor in recent years, but why does it matter? Compensation is tied strongly to productivity. Meanwhile, it is private-sector investment that boosts labor productivity, and feeds economic and compensation growth, including, of course, income. Higher output per worker means higher earnings in a competitive market. 

“Productivity depends upon foundational issues in any economy, such incentive and institutional structures like establishing and protecting property rights. Built upon such a foundation, two broad areas of investment stand as the key sources of productivity growth. The first is private investment in technology, processes and physical capital, including innovations and improvements in computers, telecommunications, machinery, tools, facilities, and production methods. Second are investments in human capital, that is, in the forms of practice, experience, knowledge, and education.”

Therefore, it is not a surprise that key reasons for slow productivity over the past decade have been sluggish private investment 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”).

Looking at the troubling issue of poor productivity growth from a policy perspective, we need to get the foundational issues right. That includes broad-based, substantive and permanent tax and regulatory relief. On the tax front, that very much means implementing relief measures that affect investment, such as allowing all businesses to expense their capital expenditures, eliminating or substantially cutting the capital gains tax, killing the death tax, and reducing corporate and personal income tax rates. Quite simply, from a productivity perspective, it’s important to incentivize entrepreneurship and private investment.

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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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