Forget job creation, tax cuts and returning any sector back to its glory days. After running into (read: stalking) former Federal Reserve Chair Ben S. Bernanke in the CBS This Morning Green Room last week, he reminded me that the REAL key to boosting economic growth and more importantly, your living standard, is labor productivity. The reason is easy to understand: “In the long run, what we can consume as a nation is closely tied to how much we can produce,” wrote Bernanke more than a decade ago.
Productivity is a measure of economic performance that compares the amount of goods and services produced with the number of labor hours used in producing those goods and services. Increased productivity can lead to higher income, greater leisure time, or a mixture of both. Productivity growth can come from technological advances, greater investment in machinery and equipment by businesses, increases in worker skill and experience, and other improvements to production.
A day before the government released the April jobs report, which showed that the economy created a better than expected 211,000 jobs and the unemployment rate ticked down to a post recession low of 4.4 percent, it reported that first quarter productivity fell at an annual rate of 0.6 percent from the prior three months. It was the worst performance in a year and that’s saying something, considering that productivity has increased at an annual rate of less than 1 percent in each of the last six years, near the lowest level since 1982, when the U.S. was mired in a double-dip recession.
Taking a longer view, from the early 1970s until about 1995, productivity growth averaged about 1.5 percent per year, below the post-World War II average of 2.1 percent. But then something big happened: between 1995 and 2000, rapid technological progress and increased investment in the advances that occurred, led to a spike in productivity, to about 2.5 percent per year. Then things really took off: From the end of 2000 to the end of 2003, productivity rose at a 3.5 percent annual rate.
In a 2006 speech, Bernanke noted, “a case can be made that the strong productivity growth of the post-1995 era is likely to continue for some time.” With hindsight, we now know that the productivity miracle of the nineties did not usher in a new economic era: From 2007 to 2016, it averaged 1.1 percent and over the last five years (through 2016), labor productivity grew at an average rate of just 0.7 percent, according to the BLS.
This is not meant to slam Bernanke (listen to this podcast and you will hear me talk about him in glowing terms with economist Mohamed El-Erian); rather, as Bernanke noted last summer, “the recent decline in productivity growth has been both large and mostly unexpected” and if it does not pick up, the U.S. will become a large, developed economy that inches along. The good news is that productivity is incredibly difficult to predict, so there’s every chance that the current period will become a footnote, rather than the beginning of a long-term trend.