PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Productivity Growth Solid in Third Quarter

By at 2 November, 2018, 8:53 pm

 

 

by Raymond J. Keating-

When it comes to economic and income growth, productivity is a central issue. But productivity growth also had been rather abysmal from 2011 to 2017, with annual average growth registering 0.7 percent.

Fortunately, according to the latest report on productivity from the U.S. Bureau of Labor Statistics, U.S. nonfarm labor productivity – that is, output per hour calculated by dividing an index of real output by an index of hours worked by all persons – grew at a rate of 2.2 percent in the third quarter of this year. That’s the exact average rate prevailing during the post-World War II-era. It also follows on growth of 3 percent in the second quarter of this year.

While productivity data tends to be pretty volatile from quarter to quarter, it is worth noting that productivity growth in the second and third quarters of this year turned out to be the best back-to-back quarterly performance since the second and third quarters of 2014. The last extended streak of solid annual productivity growth, by the way, came over the decade of 1996 to 2005.

Labor productivity, of course, is tied directly to investment and innovation. And keep in mind that real business investment grew solidly from the first quarter of 2017 through the second quarter of 2018 (with a slowdown in the third quarter hopefully being temporary). So, we should expect to see some pick up in productivity.

Critics often question how tax and regulatory relief for entrepreneurs and businesses could possibly funnel into income gains for workers? The simple answer is productivity.

Compensation is tied to productivity, and productivity, again, rests on investments made in, for example, new and improved equipment, tools, software, facilities, processes, and education, along with new products, services and entire industries, all being tied to what consumers are demanding or will respond to in the marketplace. Tax and regulatory relief incentivize entrepreneurship and investment.

While the quarterly data can be volatile, the formula is straightforward: growth in entrepreneurship + growth in private investment = enhanced productivity = increased compensation for workers.

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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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