RELATED ARTICLES "Productivity, the Stock Market and Monetary Policy in the New Economy," Southwest Economy, Jan./Feb. 2000 (Text or PDF) "Productivity, the Stock Market and Monetary Policy in the New Economy," In Depth, Nov. 1999 (Text or PDF) "The Comparative Growth Performance of the U.S. Economy in the Postwar Period," Economic Review, Q1 1992 (Text)

U.S. Economy
Productivity Growth

Evan Koenig discusses one of the new economy's defining features—faster productivity growth.

What It Is. When people talk about productivity, what they usually have in mind is labor productivity—output per hour or output per worker. Government statisticians distinguish among three underlying sources of labor productivity growth.

The first is increases in the amount of plant and equipment per worker. For example, I recently had an ink-jet printer installed in my office. It saves me from having to walk down the hall when I print something from my computer. It saves others on the floor from having to wait for my documents to print. So both my productivity and that of my colleagues have increased.

The second source of productivity growth is improvements in the quality of the workforce. One would expect a workforce with more schooling and more job experience to be more productive, on average.

The final source of productivity growth is improvements in technology and in the organization of the production process—in other words, better equipment and better management. The label economists apply to productivity gains from this third source is "multifactor productivity growth."

Why We Care. Productivity growth is important because it is the main determinant of changes in our standard of living. Chart 1 shows the growth rate of GDP per capita along with the growth rate of labor productivity. Note how growth in GDP per capita tends to rise and fall in conjunction with growth in labor productivity.

The most striking feature of the chart is the big slowdown in both productivity and per capita GDP growth during the 1970s. Average annual per capita GDP growth fell from 2.5 percent in the 1950s and 1960s to 1.1 percent in the late 1970s as productivity growth slowed from 2.4 percent to 0.5 percent per year. We don't yet have a good understanding of what caused this deterioration.

Although we saw a partial reversal in the 1980s and early 1990s, it's only been since 1995 that labor productivity and per capita GDP growth have fully recovered. Driven by rapid productivity increases in the high-tech industries, overall productivity growth is back to where it was during its post–World War II golden age.

The timing of the increase in productivity growth is noteworthy. Ordinarily, productivity growth surges as we emerge from a recession, only to taper off as the economic expansion matures. In contrast, the recent increase began after the economy had been growing for nearly five years. So, there's reason to believe the increase is not just a flash in the pan.

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