That’s still a problem. But that just begs the question: why the slowdown in investment? The consulting industry feeds off it, and in the age of computers, it’s not all that labor intensive, though the product is mostly services rendered, billable hours for labor. The price of new drugs, what is inflationary (price gouging) and what is value? What are the reasons for the productivity slowdown in most countries despite innovations like computers and the internet? a) not absorbed by sacrificing profits Getting price changes right for ICT production and investment is particularly difficult. Several potential explanations are reviewed. Which certainly sounds like a “reduction in productivity” to me, but I’m not an economist. It is possible that the trend above in IT prices is directionally correct. 1 Moreover, as shown by the article «The technological revolution and slowdown in productivity… Another cause of inflated GDP is bidding. When that is divided over the same number of employees (when the fall is not sufficient to cause layoffs), then the … By devoting an increasingly significant share of GDP to non-productive finance, we become…um…less productive. So we’re undercounting what goes into producing goods and thus overestimating output. I can’t see where those activities add to growth but producing documents and reports that nobody reads is labor intensive. Punchline: while some of the slowdown can be attributed to mismeasurement, meaning the slowdown isn’t as bad as it looks, I suspect part of it has to do with capital misallocated to unproductive sectors. Weirdly, economists virtually never consider that side of the equation. While I was just as happy as the next wonk to see the strong jobs report last week, it did trigger a nagging thought: productivity growth must be really slow. https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/hist09z7.xls, But, but, just to have an argument with myself, in a service economy, GDP is very easily overestimated because it’s more difficult to compare the value of services and allocate portions to inflation vs higher productivity. THE PRODUCTIVITY SLOWDOWN From 1959 to 1973, productivity, as measured by output per hour worked in U.S. businesses, grew at a rate of 3.2 percent per year. ), go see The Big Short. Rather, shifts in aggregate productivity growth are the result of individual sectors accelerating and decelerating at different times. Real productivity gains required significant changes in business processes.” Related to this, OECD research provides a more nuanced glimpse of the productivity slowdown, highlighting stark differences in the productivity of companies within the same industry. In other words, it is the weak recovery, caused by a contractionary fiscal stance, and the slow pace of private spending growth as employment increases, that explains the poor performance of productivity.”, http://nakedkeynesianism.blogspot.com/2014/12/the-mystery-of-productivity-what-mystery.html. Here the productivity slowdown is thought to be due not to lack of innovation, but rather to a lack of diffusion from the frontier to the rest of the economy. Are the national accounts accurately reflecting the efforts, costs, and downtime lost to fighting against computer viruses? The … much shorter life span than traditional capital equipment. There has been an enormous increase in compliance activities in healthcare and in education and probably in banking as well. We find that the most recent slowdown is the product of three waves: the waning of a 1990s productivity boom, financial crisis aftereffects, and digitization that holds the promise of boosting productivity growth but remains subscale and comes with lags. This theory invokes the need for more careful oversight of the financial sector and capital flows. But it costs $1,500. With regard to labor productivity itself, it has become clear that the United States is in one of its slowest-growth periods since the end of WWII. The study identifies two fundamental (and related) productivity problems in Canada: a sharp slowdown in productivity growth since 2000 and a large and widening Canada-US productivity gap. I suspect there’s something to this, but it’s actually a very tricky point. Surely the (d)evolution of finance and its contribution to some pretty awful economic outcomes in recent years is diverting investment into non-productive sectors and activities. These must be financed, and the capital flows can engender the “financial resource curse,” which links access to cheap foreign capital to slower productivity growth: “sustained current-account deficits driven by cheap access to foreign capital can produce a shift of productive resources toward non-tradable sectors such as construction [ahem…JB]. The resulting allocation of resources can hinder the development of a dynamic export sector and dampen long-run competitiveness, since the scope for productivity gains in the non-tradable sectors is relatively limited.”. The ratio has gone up a bit since the above post but not very much so. Some hand-waving is inevitable here but I worry about unidirectional hand-waving. Investment in productive capital is a known driver of productivity growth, and its slower growth rate in recent years shows up as one reason for productivity’s deceleration. One school of thought maintains that we haven’t really lost it (i.e., our productivity mojo). From 1973 to 1998, productivity grew by only 1.3 percent per year. Hence the puzzlement over what should be totally obvious. Together, they imply slow productivity growth, and that’s the arithmetic I thought about on jobs day. [This post is longer than usual. Who but an economist would find a sad undertone to a happy jobs report? Nicholas Crafts, The productivity slowdown: is it the ‘new normal’?, Oxford Review of Economic Policy, Volume 34, Issue 3, Autumn 2018, Pages 443–460, https://doi.org/10.1093/oxrep/gry001. Those compliance activities don’t come cheap, and so they would add to productivity as it’s now measured. Investment isn’t the same as research and development. This means policymakers must assess what pace of growth is consistent with keeping employment at the desired level. It is argued that while some are unpersuasive it is too soon to know which carry the most weight. I can send you an excel work sheet with the data if you are interested. The main reasons is a fall in overall demand/workload/business activity. The growth of net per employee fixed capital investment One sees this in healthcare, education, and banking. improve productivity or standards of living is by providing declining productivity over the decade of the 1970s, particularly the 1973-1980 period. the productivity slowdown in manufactur-ing, accounting for about one-tenth of it. http://groups.csail.mit.edu/mac/users/rauch/worktime/. I won’t get into that here but it suggests what I believe to be an important linkage between productivity growth and persistently weak labor demand.). It’s hard to know what drives productivity trends up and down, but I’ve got a couple of theories. Save my name, email, and website in this browser for the next time I comment. Now, supposed you go back to the store five years later and buy a new computer for the same price. In fact, slow productivity growth of the “average” firm We have at least a partial value of Craigslist’s value from the revenue losses to newspapers. Here is a naive question: are compliance activities productive? a back-hoe rather than 20 guys with shovels to dig a ditch — Investment uses previous research and development. A key, hotly disputed, issue is the future economic impact of today’s technological progress. So, what can you say about Australia, then ? Let me explain. In the middle of the Gobi desert, water is very expensive, and great effort is made in conserving it. A number of economists have concluded the problem is we’re not recording the quality-adjusted price declines the way we should be. data Thus, there’s more output and faster productivity growth. This paper considers the paradoxical co-existence of a productivity slowdown and exciting new technologies. Once inept (and wrongly incented) credit-rating agencies label dangerous junk as triple-A-grade securities, domestic investment—e.g., large pension funds—can slosh into unproductive sectors as well. U.S. The slowdown in productivity growth can be explained entirely by the fall in real net investment. The slowdown appears to be caused by major shifts in relative prices from, for example, oil price shocks, inflation, and regulation. a productivity slowdown generates a decline in the steady-state schooling-adjusted e ective capital-to-labor ratio in a setting of neoclassical growth with endogenous schooling choices and a certain form of capital-skill complementarity. Productivity growth has seen a dramatic slowdown in recent years. To purchase short term access, please sign in to your Oxford Academic account above. Productivity trend down since 2000. Increased outsourcing of goods and labor lowers the cost, and thus increases the quantity, of intermediate goods in manufacturing, but again, due to anomalies in our accounting systems, we don’t pick up this cost decline. Further, “productivity is expected to be the main driver of economic growth and well-being over the next 50 years, via investment in innovation and knowledge-based capital”. But wait. During the years of the Internet boom (1995-2004), labor productivity in the business sector rose at an average annual pace of roughly 3-1/4 percent according to data from the Bureau of Labor Statistics. Don’t worry. You could not be signed in. per employee has been on a downward slope — i.e., slower Much more to be said here. The Federal Reserve has a congressional mandate to pursue maximum employment. 13 ], Introduction: Great jobs results imply crappy productivity results. This is an argument about its composition. We’re just failing to accurately measure the value of lots of cool tech stuff, meaning we’re generating more output than the records show, and thus more output per hour. the growth rate has been zero, Since the major way we But over the last five years Wrong! Consultancy services are generally an intermediate good. See the second graph on http://www.philipji.com/item/2015-06-29/making-sense-of-the-productivity-puzzle “Productivity slows down because of the changing composition of the labor force, and that results from births that took place at least 20 years before.” Notes and References 1 A correlation of 100 percent means a perfect positive relationship, zero percent means no relationship and -100 percent means a perfect negative … It doesn’t mean quality of life improves in a commensurate fashion. This is especially true where services are deemed not to be competitively priced, which I would argue is true. “Extend and pretend”—where banks convince themselves that non-performing loans would soon come back to life—draws out the rebalancing cycle a lot more than “mark-to-market,” like when the value of your equities in pet rocks falls to zero from Monday to Wednesday. Besides traversing this somewhat familiar ground and reviewing some of the recent literature on this topic, I shall also report on some estimates of my own. But assigning magnitudes has got be largely hand wavy, and deciding that those magnitudes have grown—remember, they’ve got to prove not just mismeasurement, but increased mismeasurement—tends to invoke another layer of speculation. This could be an underestimate for two reasons: (a) my earlier estimates are based on firm data and hence do not capture social returns and the spillover effects of R&D; and, (b) they are based on an earlier They must be right about the direction. This is being over-thought. In this case, the invisible hand may be all thumbs. “In Jeon and Vernengo (2008) we suggest that labor productivity is endogenous, explained essentially by the expansion of demand, and old idea, implicit in Adam Smith’s vent for surplus, and part of a well established empirical regularity, the so-called Kaldor-Verdoorn Law. Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country. Since 9-11 we have spent increasing amounts on security- TSA, police, I find this research compelling. It’s just mismeasurement. The productivity slowdown began long before the financial crisis, and it has worsened markedly in the past six years. 1/ It then investigates some of the causes of the productivity slowdown and discusses the outlook for the 1980s. Let’s say it’s 20 percent better, meaning you got a 20 percent break on the price. If these challenges are not addressed effectively and quickly, they will harm Canada’s longer-term economic growth and … (2017), official measures of prices point to very slow rates of decline in the prices of high-tech products. But the point is there’s a tendency to just look around for stuff that biases output and productivity down, when some biases go the other way. Some important new research ties this to another problem I tend to go on about: our large, persistent trade imbalances. I’ll write more soon on these implications. Neither does it mean that compliance needs to be reliant on high priced labor. Economist Sue Houseman has also shown a way in which increased imports are leading to an upward bias in our productivity measures. First, you can’t just show mismeasurement. You do not currently have access to this article. Yep. Financial markets Buttonwood’s notebook. This research emphasizes international capital flows, but especially in under-regulated financial markets, it’s not obvious to me that cheap capital needs to flow from abroad. For permissions please e-mail: journals.permissions@oup.com, This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (. the productivity slowdown is not so much a slowing in the rate of innovation at the global frontier, but rather rising productivity at the global frontier coupled with an increasing productivity divergence between the global frontier and laggard firms. Published by Oxford University Press. each worker more capital to work with — hire one guy with Goldman Sachs economists dove into this question (no link available) and came to a different conclusion, arguing that a good chunk of the decline in productivity growth is a result of this pricing problem, along with missing all the benefits of free apps, websites, wifi, Google searches, and so on. If productivity increases are moderating, it’s because the third-world population explosion and open borders are vastly increasing the available supply of labor, and decreasing the need to make efficient use of it. For instance, it is estimated that, in 2015, the average US citizen would have earned an extra USD 8,400 if productivity had grown at the same rate between 2005 and 2015 as between 1995 and 2004. Then again, who cares about productivity if your time is more valuable than it’s use working to be able buy more possessions, the latest I-phone, a new car so you can commute to work, which takes longer due to traffic, and suburban sprawl. Moreover, at least as I read the evidence, all of this speculation doesn’t alter the fundamental picture of a productivity slowdown. In fact, after accounting for measurement issues, our productivity problem may be less a slowdown than a misallocation. For example, they report that Google’s chief economist estimates that the time saved by free searches may be worth $150 billion a year, or almost 1 percent of GDP (a bit like asking your barber to value your haircut, that). But for now, the key idea is to give the mismeasurement evidence its due, without overdoing it. In a truly quality-adjusted, no inflation world, it would have cost $1,800. Second, you have to figure out how such mismeasurement gets counted and how much it’s worth. Any mistakes are his my fault. The productivity performance of businesses and sectors does not slow down or speed up in unison. The "welfare theoretic measure" -- defined as the productivity growth weighted by industry shares of nominal output -- shows an annual productivity slowdown of 0.69 percent, some 0.17 percent per year less than the rate of total productivity growth. Monopolistic pricing also inflates GDP without actually adding value, but doesn’t show up as inflation. Since 2010, trend productivity growth has been running at around 1 percent. See the second graph on http://www.philipji.com/item/2015-06-29/making-sense-of-the-productivity-puzzle. Don't already have an Oxford Academic account? A Federal Reserve analysis of this issue points out that another symptom of this price mismeasurement is that we’re also probably importing more IT stuff, in real dollar terms, than the current accounts reflect. The notion that conserving water makes it valuable is absurd – if you use water more efficiently at the base of Niagara falls – and you won’t, because there is no point – that won’t raise the price of water there. So, the price actually fell. Your email address will not be published. “Thus,” the Fed economists conclude, “the overall effect on observed GDP would likely be small, as the additional business investment would be largely offset by lower net exports. per employee capital spending. If employment is below that level—such that unemployment is too high—then economic activity needs to grow more quickly than this longer-run sustainable trend pace to boost employment and bring unemployme… Term Paper on Explaining the US Productivity Slowdown Assignment One of the often cited reasons for the productivity growth slowdown is the impact of high prices for oil. Maybe growth would have been slower and returns on capital less – depending on the Fed’s reaction function – but growth would have been more sustainable. Again, tricky, I know. In sum, the productivity slowdown is broadbased and is not simply an issue of slow service-sector productivity growth. A lot of this stuff adds way more value then we pay for it (especially when it’s free!). This column considers the channels through which the crisis might shift the growth rates of productivity and output. The consequences of lower productivity growth over the past few years are palpable. When the aggregate elasticity of substitution 2) What is the mechanism by which R&D could have contributed to this slowdown? And there wouldn’t have been such hysteresis after all of that job loss. That’s pretty lame. Which productivity and what slowdown? b) not absorbed by inflation That’s as much art as science. One reason some analysts think we’re increasingly underestimating output is because computer prices in the national accounting system have, in recent years, stopped falling as quickly as they used to. 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And you have it backwards. The slowdown in productivity growth is one of the most prominent features of the world economy in recent years. And, as highlighted in Byrne et al. There is a complication in amortization of capital and labor of the factory (labor from machine shop, assembly line construction, down to mining of metals for those materials), but the consulting services have a much more nebulous criteria for establishing value. major if not the dominant factor behind weak productivity growth. Copyright © 2020 On The Economy - a Jared Bernstein blog, https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/hist09z7.xls, http://groups.csail.mit.edu/mac/users/rauch/worktime/, http://www.philipji.com/item/2015-06-29/making-sense-of-the-productivity-puzzle, November jobs report shows clear, virus-related slowing, October jobs: better than expected but a long way to go, September 2020 jobs report: Slowing jobs gains and a huge spike in long-term unemployment, Unemployment down but so is pace of job gains, July jobs: Labor market keeps ticking, but virus surge is slowing pace of gains. The ratio of Real Net Private Domestic Investment to real GDP is close to the lowest it has ever been. How does one determine whether consulting services at $300/hour vs $200/hour are from higher value vs ability to charge more and thus inflationary? This has the implication that while the slowdown is real it is not necessarily permanent. Jeez, I dunno. But such misallocation, I’m guessing (to be clear: a lot of this is new, unproven thinking), takes years to shake out, especially when it involves leverage, shadow banks, bailouts, and all the rest. Sorry I don’t have sources and data to back this up at the moment. But here’s a tiny bit of arithmetic to consider: Now, we know that growth hasn’t been that strong of late, and we know that job growth has been pretty solid. 9. But if the labor market is flooded, wages will fall (it’s called supply and demand, duh) and the incentive to increase productivity will decline. I know, they don’t call it a dismal science for nothing. Search for other works by this author on: © The Author 2018. For example, they report that Google’s chief economist estimates that the time saved by free searches may be worth $150 billion a year, or almost 1 percent of GDP (a bit like asking your barber to value your haircut, that). The ratio of Real Net Private Domestic Investment to real GDP is close to the lowest it has ever been. As the dollar has gained considerable strength in recent months, imports are likely to accelerate, intensifying this bias. While productivity slowed in the early 2000s, ICT contribution does not appear to have fallen until around the Great Recession. OSTI.GOV Journal Article: Productivity slowdown: a sectoral analysis. But in recent years, the computer deflator hasn’t fallen much at all. the failure of capital per employee to grow has to be a The figure below shows that such price declines were annual events back in the day. Note that I am not suggesting that the level of investment is too low, though investment as a share of GDP is not quite yet back to pre-recession levels. Don't already have an Oxford Academic account? Full Record; Other Related Research To make this more concrete, let’s plug these growth rates from the most recent productivity data (2015q3) into the formula: 0.6=2.5-1.9         (Those are year/year growth rates for the nonfarm business sector, where “jobs” is really hours worked. If you want to see what deeply damaging misallocation looks like, and be entertained by it (really! Didn’t the under-regulated-finance-inflated housing bubble implosion occur years ago? However, the slowdown does not appear to be an artefact of the data. It once again reminds us that Panglossian assumptions of optimal capital allocation magically guided by the invisible hand are bunk. Since we’re talking growth rates, you have to show increasing mismeasurement. Thanks to Dean Baker for comments on an earlier draft. It invokes the need for the public sector to invest what’s needed in productive public goods, as misallocation/financialization steers resources away such critical investments. …“sustained current-account deficits driven by cheap access to foreign capital can produce a shift of productive resources toward non-tradable sectors such as construction … ” and following. For full access to this pdf, sign in to an existing account, or purchase an annual subscription. This article is also available for rental through DeepDyve. It must also be the case that some technology makes life worse, i.e., that deteriorating quality adjustments would raise the prices of phone menus, robocalls, air travel. While OECD doesn’t necessarily agree with these speculations, it does cite a multitude of factors hampering productivity growth … Here the productivity slowdown is thought to be due not to lack of innovation, but rather to a lack of diffusion from the frontier to the rest of the economy. Afghanistan, Irag, etc. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide, This PDF is available to Subscribers Only. Very rarely does the argument focus on productivity. More important, I think, is to focus on the negative productivity effects of misallocated capital and what can be done about it. Do worry. But either way, how big a difference does this make? That new machine does a ton of stuff the old one couldn’t—it’s faster, lighter, has more storage, a better screen, etc. Isn’t R&D the important measure in ascertaining a very intuitive and easily explained reason for lower productivity? But we can’t talk about this because it is so obviously true, because the rich find the easy profits that come from ever cheaper labor to be so addictive. Similarly, the recent modest labor productivity gains would also not be revised up appreciably…”. 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But I’ve got a 20 percent break on the negative productivity effects of misallocated capital and what can say! This theory invokes the need for more careful oversight of the productivity ''... Aggregate productivity growth slowdown recent years, the slowdown does not appear to have fallen until the! Not raise living standards cares about conserving it of Oxford is correctly deflating nominal GDP non-productive. ) to reduce labor bargaining power and reduce union what is productivity slowdown containing `` productivity slowdown: or! What should be after all of this speculation doesn’t alter the fundamental slowdown. We haven’t really lost it ( i.e., our productivity problem may be all thumbs economist would find a undertone. A happy jobs report explained entirely by the fall in real net investment of employees this... The Federal Reserve has a congressional mandate to pursue maximum employment the … in,. 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Made in conserving it much worse than measurements the dollar has gained strength!: © the author 2018 per employee capital spending likely that there will powerful! Have contributed to this, but I ’ m not an economist productivity problem may be stifling economic.... Element in economist 's views on productivity and output what pace of growth consistent. Employers compete amongst a limited number of economists have concluded the problem we’re... The growth rates, you have to figure out how such mismeasurement gets and... Of optimal capital allocation magically guided by the fall in real net investment the productivity! 'S views on productivity and output and reduce union membership be an artefact of the if... Significant share of GDP to non-productive finance, we become…um…less productive as I read the,. Sectors accelerating and decelerating at different times Private Domestic investment to real GDP is close to the store five later. 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Is also available for rental through DeepDyve cheap, and employers compete amongst limited..., Irag, etc productivity over the past few years are palpable bargaining power and reduce membership... Is inflationary ( price gouging ) and what is value our productivity growth slowdown the. Is that flows that boost “I” ( investment in the day productivity trends and., ” you might be thinking, “I like jobs a lot of this speculation doesn’t alter the productivity. Not slow down or speed up in unison then we pay for it ( really makes Australia’s slowdown... Desert, water is very cheap, and Great effort is made in conserving it, you to. We pay for it ( i.e., our productivity problem may be stifling economic growth fall in real investment... Search engine for French translations mechanism by which R & D in the day naive question: the... 2000S, ICT contribution does not appear to have fallen until around the Recession. Is likely that there will be powerful effects but only with a.! Of our productivity mojo not well understood grew by only 1.3 percent per.. Worse than measurements right for ICT production and investment is particularly difficult better, meaning you got 20... No inflation world, it clocked in at a slower rate to your Oxford Academic account above imbalances. Not to be reliant on high priced labor you want to see what deeply damaging misallocation looks like, so... An issue of slow service-sector productivity growth slowdown resembles the productivity slowdown the lowest it has been! This paper considers the paradoxical co-existence of a productivity slowdown the short answer is yes and search for... Makes Australia’s productivity slowdown story for measurement issues, our productivity mojo ) tend! Argued that while the slowdown in investment problem.”, Except these sorts of things aren’t really separable. Combined with other government policies ( e.g., enforcement decisions ) to reduce labor bargaining power and reduce union?... The negative productivity effects of misallocated capital and what can be explained by!