The Labor Department recently reported a disappointing US worker productivity contraction of an annual percent of 2 percent in the fourth quarter of 2012. In the same timeframe, the economy declined at an annual rate of .1 percent, potentially attributed to defense cuts and slower restocking. The departure from positive numbers in the third quarter may also be due to expectations of the potential implications of the sustained fiscal cliff issue. Some economists are not surprised with the weak trend in productivity from the last two years as they see it as part of the cycle of recovery from a recession. For a period immediately after a recession, productivity will appear to rise because a smaller labor force must meet increasing demand. As demand rises, companies must hire more workers if they want to compete in the marketplace. (The full article.)
According to Timothy Aeppel, “Nearly all the world’s advanced economies are grappling with a productivity problem” starting from a decade ago. The rate of growth in multifactor productivity started to decline, in the US from annual growth of 0.7% in the 1990s to 0.39% in the 2000s. There is no consensus on the exact cause of the slowdown. Some says it is the anticipation of the recession but it does not explain why the length of time is so long. Japan grappled with this same problem from the late 1980s through the 1990s, known as the “Lost Decade.” One of the most famous papers on this topic concludes that it was a business cycle problem, that of low growth in factors of productivity. Is this worldwide problem a reflection of the same issue?
Solow’s growth model shows that economic growth can be sustained if there is an increase in capital accumulation and/or population growth. However, technological progress is essential for continuous long-term growth by shifting the production function up. Robert Gordon disagrees with the theory that the 2% productivity increases of the post-WWII era will persist. As he argues, the United States economy grew due to the lingering effects of three industrial revolutions. Low productivity in the last decade seems to support Gordon’s argument, However the recession of this period makes it difficult to form conclusive remarks or to develop an experimental design. The changes to spending and behavior prior to and after the recession may be significant factors to the problem. However, in macroeconomics, it is difficult to analyze the recession because there is a shortage of data (relatively few recessions throughout history, and lack of consistent measurements) and there exists a time series issue. This decade also speaks to Solow’s argument because the technology of the last decade may not be so substantial as to shift the production function by much. Slow economic growth may only be a reflection of movement along the low marginal increase portion of the production function.
Singapore will pursue an economic restructuring in the New Year with plans to increase productivity through strategies such as enhancement of “productivity grants”, allow businesses easier access to credit, and reduction of transport costs etc. It will be interesting to see if these plans will succeed as it relates directly to changes to capital accumulation and innovation.
Link to US Bureau of Labor Statistics Productivity and Costs release.