The Slowdown in Productivity Growth: Analysis of Some Contributing Factors

Labor Productivity in the private business sector grew at an annual rate of 1 percent from 1973 to 1978, about one-third of its rate of growth from 1948 to 1965. The effects of this slowdown were both substantially reduced economic growth and higher prices.

October 2015 | by David Delaney

A comprehensive analysis of recent economic growth has been made by Edward F. Denison, who examined the effects of regulation on growth in a framework that assesses the contributions from various potential causal factors. Our approach is different from his in several respects, depending primarily on the definition of output and the measurement of capital input. Several other studies have focused on particular issues in the productivity puzzle, such as analyses of the effects of capital formation, energy, labor force composition, and intersectoral shifts of labor.

This paper investigates productivity in the private business sector for which quarterly labor productivity and cost statistics are published by the U.S. Bureau of Labor Statistics (BLS). The basic methodology weights growth rates of capital and labor inputs by their shares in gross domestic product of this sector. Although growth in labor productivity is the tar-get for explanation, the frame work includes the contribution of multifactor productivity growth-the Hicks-neutral residual. The measurement techniques draw primarily on the work of Denison and Dale W. Jorgen-son, as outlined below. The factors we examine as possibly contributing to the slowdown are limited to those that can be quantified and adapted for inclusion in a national accounts framework. Therefore, we do not explore such issues as deterioration of the work ethic, and any effect from such unmeasured phenomena will presumably appear in the residual of our analysis. In an alternative framework based on regression analysis, one could try to measure such phenomena because the standards for quantifying them could be relaxed. However, the collinearity in single-equation regression models makes the coefficients associated with any single factor highly variable, depending greatly upon the other factors included in a particular specification.

We examine, in addition, the existence and timing of the productivity slowdown and its pervasiveness among major industry sectors of the economy. And we estimate the contribution to this slowdown of changes in the composition of the labor force, changes in capital-labor ratios, trends in the ratio of hours worked to hours paid, interindustry shifts of capital and labor, capital expenditures for pollution abatement, and in-creases in energy prices. Most of these effects are analyzed by interpreting them as augmenting or abating the effective input of capital or labor. A general point about the analysis of the slowdown needs to be made at the outset. For a particular phenomenon to contribute to a slowdown in productivity growth, its effects must be greater in the slowdown period than in the reference period. We therefore need data to estimate the effects in both periods in order to determine any contribution to the slow-down. It is not sufficient that a particular negative factor is at work during the slowdown; it must be working demonstrably harder than before.

 

Executive Editor

 Ms Anna Sullivan

Ms Anna Sullivan