Reconsidering the Conventional Wisdom about Productivity
Published in International Economy, Fall 2017


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The conventional wisdom is that labor productivity (i.e., nonfarm business output per hour worked by employees in the nonfarm business sector) has grown only very slowly over the long term and that the rate of productivity growth has recently experienced a surprisingly sharp decline. Both aspects need to be reconsidered.

The official measure of the growth rate of productivity over the past 60 years (ending in the second quarTter of 2017) has been just 2.0 percent. I believe this is an underestimate and may be a substantial underestimate. As I have explained elsewhere (Journal of Economic Perspectives, Spring 2017), the growth rate of real output is underestimated because the official statistics do not accurately reflect the contribution to real output of quality improvements and of new products. The underestimate of real output growth translates directly into an underestimate of the growth of productivity. While it is impossible to know by how much the true growth rate of real output has been underestimated, I believe it could be as much as 2 percent a year. If that is true it would double the long-term growth of productivity.

The official productivity growth rate has declined to just 1.2 percent in the most recent decade (to the second quarter of 2017) from 2.8 percent in the previous decade. But this just brings the average productivity growth over the past twenty years back to the exact 2.0 percent average of the previous forty years. The anomaly worth studying may therefore be the sharp rise in productivity growth from 1997 to 2007. Researchers who are concerned about the low productivity growth in the past decade should instead be asking why the decade from 1997 to 2007 was an outlier with productivity growth rate rising sharply from the rate during the previous forty years.