Productivity Growth is Moving in the Right Direction

By at 7 March, 2019, 4:58 pm

by Raymond J. Keating-

According to the latest report from the U.S. Bureau of Labor Statistics, nonfarm labor productivity grew by 1.9 percent in the fourth quarter. For all of 2018, the average annual rate of productivity growth was 1.3 percent.

(As noted by the BLS: “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers.”)

These numbers mark an improvement in productivity growth occurring over the past two years. However, there is much room for improvement.

In 2016, productivity growth barely inched ahead at 0.2 percent rate. That improved to 1.1 percent in 2017, and 1.3 percent in 2018. Also, productivity growth in the last three quarters offered the best three-month performance (2.8 percent in the second quarter 2018, 1.8 percent in the third, and 1.9 percent in the fourth) since the recession.

Of course, productivity is a key issue when talking about economic and income growth.

Unfortunately, though, the post-recession stretch of poor productivity growth continues. Keep in mind that annual productivity growth post-World War II has averaged 2.1 percent. But from 2011 to 2018, productivity growth averaged a meager 0.8 percent. This 8-year run of poor productivity growth arguably is the worst stretch dating back to the start of the data set in 1947.

Source: The Federal Reserve Bank of St. Louis, FRED

The last extended streak of strong productivity growth occurred from 1996 to 2005, where annual productivity growth averaged 3.0 percent.

Labor productivity not only relies on investments in education, but very much on entrepreneurship, investment and innovation. That’s why reduced governmental burdens placed on starting up, expanding, operating and investing in businesses are so essential to economic and income growth.

On the matter of worker compensation, as SBE Council has pointed out before, it is tied to productivity, and productivity 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.

Business investment has been strong since the beginning of 2017. And we have seen, as noted, some improvement in productivity. The hope is that productivity growth will continue to improve as long as business investment growth continues, and has the incentive to do so.

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

News and Media Releases