The Latest on Productivity Growth and the Overall Trend

By SBE Council at 2 February, 2023, 3:53 pm

by Raymond J. Keating –

Labor productivity – or the amount of goods and services produced per hour of work – matters to both businesses and workers. Enhanced productivity boosts profits for businesses and income for workers, and is vital to fueling economic growth overall.

So, while productivity is important, the U.S. Bureau of Labor Statistics (BLS) report on productivity often needs some digging into in order to get a clear picture as to what’s behind the topline nonfarm business sector labor productivity number.

The BLS has estimated that productivity grew by 3.0 percent (annualized, seasonally-adjusted rate) in the fourth quarter 2022. Meanwhile, annual average productivity for 2022 declined by 1.3 percent in 2022 versus 2021.

Let’s look a bit deeper.

Keep in mind that productivity is calculated by dividing an index of real output by an index of hours worked. And as SBE Council has noted before, the sweet spot on productivity is strong growth in both output and hours worked, with output growth running well ahead of the growth in hours worked.

In the fourth quarter of 2022, output grew by 3.5 percent, while hours worked went up by 0.5 percent. That resulted in 3.0 percent productivity growth.

In terms of the annual average rate of -1.3 percent for 2022, the BLS reported: “This is the largest annual decline in productivity since 1974, when productivity decreased 1.7 percent, and is the second-largest annual decline in the series, which begins in 1948.”

However, the underlying numbers aren’t nearly as grim, as output grew by 2.3 percent, but hours worked were up by 3.7 percent. So, both output and hours worked were up, but hours worked grew at a much faster pace. In effect, output growth under-performed, while hours worked over-performed.

Source: Federal Reserve Bank of St. Louis, FRED

Looking at data since 1952, real annual nonfarm business labor productivity averaged 2.1 percent, including 3.3 percent output growth and 1.2 percent growth in hours worked. Free from significant distortive effects (such as the Great Recession and the recent pandemic), the last time the U.S. had a stretch of solid productivity growth was from 1996 to 2005.

In the end, productivity growth comes from innovation, improved efficiency and operations, and investments in technology, equipment and facilities, education, and skills. These undertakings require incentives and resources for entrepreneurship, and private investment by investors, businesses and workers. In turn, that means broadbased tax and regulatory relief – contrary to the recent federal policy emphasis on higher taxes and more regulation.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.