Productivity Growth

Source: Obama White House archives, Jul 2015

The third level of mystery is explaining the conceptual drivers of productivity growth. Even if we agreed on the facts of historical productivity growth, explaining those facts is more difficult still. Moses Abramovitz famously called TFP a “measure of our ignorance,” the unexplained gap between input and output.1 And a rigorous conceptual understanding of that gap continues to elude economists

Figure 2—and all subsequent references to annual U.S. labor productivity in these remarks—references real output per hour worked in the private nonfarm business sector (excluding government enterprises) as reported by the Bureau of Labor Statistics (BLS). In other contexts, I have referenced the BLS’ labor productivity series for the nonfarm business sector (including government enterprises). The two series are closely correlated and exhibit the same trends, but excluding government enterprises permits the analysis of total factor productivity (TFP) that follows.

a simple thought experiment provides a sense of how important productivity is to incomes: what if productivity growth from 1973 to 2013 had continued at its pace from the previous 25 years? In this scenario, incomes would have been 58 percent higher in 2013. If these gains were distributed proportionately in 2013, the median household would have had an additional $30,000 in income. Had income inequality and labor force participation not worsened markedly, middle-class incomes would be nearly twice as high.

Virtually all the variation in labor productivity growth is accounted for by variation in TFP.

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