Expert Commentary

Paltry labor productivity stunts American living standards

Poor labor productivity gains are hobbling America’s economic recovery, especially in western states.


America’s recovery from the Great Recession of 2007-2009 has been a languid affair. A 2017 paper from the Federal Reserve Bank of St. Louis blames anemic labor productivity growth.

The size of an economy is usually measured in terms of gross domestic product per year (GDP, the total value of all goods and services produced in an economy). Two forces tend to drive GDP: employment growth and labor productivity growth.

Labor productivity allows economists to quantify changes to standards of living: “Labor productivity growth is the key factor that increases per capita standard of living since it measures the average growth rate of the amount of goods and services that each individual can consume,” the Fed writes.

The paper compares two periods of growth: between 2001 and 2007, when overall GDP grew by 2.8 on average; and 2009-2015, when GDP grew by 2.2 percent on average.

While those numbers sound comparable, the two periods saw sharply divergent rates of labor productivity growth. In the first, labor productivity grew on average 2.1 percent annually; between 2009 and 2015, it grew just 0.6 percent annually — and at a greater rate in only two states: North Dakota (which was enjoying an oil boom) and West Virginia (where the increase was marginal). Every other state saw productivity grow more slowly than it did in the early 2000s.

In short, labor productivity over this period was, on average, 1.5 points lower than during the early 2000s. That translates into dim prospects for improved standards of living. People are working, but they’re not producing more per hour and, therefore, they’re not getting raises.

Though the overall productivity decline was nationwide, the western states fared worst. There the growth differential was -2.6 percent, meaning productivity growth during the second expansion was 2.6 points less than it was during the first.

The data for the second expansion ends in 2015, yet GDP growth continues. With the Fed declaring full employment in the summer of 2016 — meaning that most people looking for a job can find one — most economists expect wages to start ticking upward again. But wages alone do not improve productivity.

Other resources:

The Bureau of Labor Statistics (BLS) publishes employment statistics monthly. Fed Chair Janet Yellen has said that the economy needs to add 100,000 jobs each month to provide for new workforce entrants.

The Bureau of Economic Analysis releases GDP data.

Journalist’s Resource has covered many aspects of income inequality. For more on stagnant wage growth and inequality, see this short paper by economists at the London School of Economics.

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