How does productivity affect our future?
Since the beginning of 2011, growth in real output in the nonfarm business sector has been slow, averaging just 2.7% percent. And most of the economic growth has been driven by increases in labor inputs and not by increases in labor productivity. The graph shows real output growth (green line) decomposed into growth in labor input (red line) and growth in labor productivity (blue line), where productivity is measured as real output per hour. Given that the output growth rates are only slightly different from—either a little above or a little below—growth in hours, the majority of growth in output has come from increases in hours instead of increases in labor productivity. Labor productivity growth averaged 0.7% over this period, accounting for just 27% percent of real GDP growth.
Labor productivity growth amounts to the average growth of how much goods and services each individual can consume and, thus, is the driving force behind increases in the standard of living. More importantly, a small difference in labor productivity growth leads to a dramatic difference in the standard of living over the long run. For example, if labor productivity growth held steady at 2%, which is the rate seen in the expansion from 2001 to 2007, the living standard would double in 35 years. If labor productivity continues to grow at 0.7%, it would take 99 years to double the standard of living.
How this graph was created: After searching for “nonfarm business sector,” select “Index 2009=100” for the three series and click on “Add to Graph.” Then go to the “Edit Graph” section and select “Percent Change from Year Ago” under “Units.” Finally, click on “Copy to all” and change the starting date to “2011-01-01.”
Suggested by Yili Chien and Paul Morris.
View on FRED, series used in this post: