http://nyti.

ms/1TgrJVD

ECON OMICMY ST ERY

WhyIsProductivitySoWeak?Three
Theories
NeilIrwin@Neil_Irwin

APRIL28,2016

Morethan151millionAmericanscountthemselvesemployed,anumber
thathasrisensharplyinthelastfewyears.Thequestionisthis:Whatare
theydoingallday?
Becausewhateveritis,itbarelyseemstoberegisteringineconomic
output.ThenumberofhoursAmericansworkedrose1.9percentinthe
yearendedinMarch.NewdatareleasedThursdayshowedthatgross
domesticproductinthefirstquarterwasup1.9percentovertheprevious
year.Despiteconstantadvancesinsoftware,equipmentandmanagement
practicestotrytomakecorporateAmericamoreefficient,actual
economicoutputismerelymovinginlockstepwiththenumberofhours
peopleputin,ratherthanrisingasithasthroughoutmodernhistory.
Wecouldchalkthatuptoastatisticalblipifitwereasingleyear
productivitydataarenotoriouslyvolatile.Butthishasbeengoingonfor
sometime.From2011through2015,thegovernmentsofficiallabor
productivitymeasureshowsonly0.4percentannualgrowthinoutputper
hourofwork.Thatsthelowestforafiveyearspansincethe1977to1982
period,andfarbelowthe2.3percentaveragesincethe1950s.
Productivityisoneofthemostimportantyetleastunderstoodareas
ofeconomics.Overlongperiods,itistheonlypathwaytowardhigher

levelsofprosperitythereasonanAmericanworkermakesmuchmore
todaythanacenturyagoisthateachhouroflaborproducesmuchmore
ingoodsandservices.Putbluntly,ifthekindofproductivitygrowth
impliedbythenewdatapublishedThursdayweretopersistindefinitely,
yourgrandchildrenwouldbenoricherthanyou.
Butitisalsoreallyhardtomeasure,particularlyforservicefirms.
(HowproductivewereemployeesatFacebook,oryourlocalbank,last
quarter?Havefuntryingtofigureitout.)
Andevenwithyearsofhindsight,economistsareneverquitesure
whyproductivityrisesorfalls.Duringthe2008recession,labor
productivitysoared.Wasthisbecauseemployerslaidofftheirleast
productiveworkersfirst?Becauseeverybodyworkedharder,fearfulfor
theirjobs?Orwasitameasurementproblemasgovernmentstatistics
takersstruggledtocapturefastmovingchangesintheeconomy?We
dontknowforsure.(Heresoneanalysisthatemphasizesthefirst
explanation.)
Thatisalongwayofsayingwedontknowforsurewhatisgoingon
rightnow,orhowlongitwilllast.Butthepossibleanswersrangefrom
utterlydepressingtodownrightoptimistic.

TheDepressingScenario
Theproductivityslowdownisreal,anditsnotgoingaway.Earlierwaves
ofinnovationintechnology(acomputeroneveryofficeworkersdesk,for
example)andmanagementstrategies(likeoutsourcingnoncore
functions)havebeenfullyputintoplaceacrosscorporateAmerica,andso
arenolongerincreasingproductivity.
Addtothataslowdownincapitalspendingbybusinessessincethe
2008recession,whichmeansworkersarentgettingbetterequipmentor
softwarethatmighthelpthemdotheirjobsmoreefficiently.Moreover,if
youbelievethetheorymentionedaboveaboutlowproductivityworkers
beingmorelikelytolosetheirjobsduringtherecession,thepeople

returningtothelaborforcenowmaybelesseffectiveatboosting
economicoutputforeachhourtheyputin.
Inthedepressingscenario,Americansstandardsoflivingarejust
goingtogrowmoreslowlyinthefuture,andtheresnotmuchwecando
aboutit.Fortunately,thisisnttheonlypossibleone.

TheNeutralScenario
Maybewejustarentcountingthingsrightor,tousethe
economistspreferredterm,thereismeasurementerror.
Afterall,entireindustriesarebeingtransformedinwayshardto
accountforindataongrossdomesticproduct,particularlyintechnology
andservices.Havingahighpoweredcomputerinourpocketsandsocial
networksthatletusstayintouchwithfriendsmaymakeusbetteroff
thanthenarrowmathofgrossdomesticproductwhichcountsonly
whatwepayforwouldsuggest.
Still,itsnotclearwhythesenonmarketgainsinqualityoflifewould
besodifferentnowthantheywereinearliergenerationswhen,for
example,videocassetterecordersbecamewidespreadortheairbecame
cleanerthankstoenvironmentalregulation.
Theissueisnotwhethertheresbias,wrotetheeconomistsDavid
M.Byrne,JohnG.FernaldandMarshallB.Reinsdorfinapaperon
measurementissuesinproductivityattheBrookingsPapersonEconomic
Activitythisspring.Thequestioniswhetheritslargerthanitusedto
be.
Theirconclusion,afterexaminingtechandothermeasurement
issues,isthatitisnt.Thatsaid,thetoolsthatstatisticskeepersuseto
measuretheeconomyareneverperfect,sotherecouldbeproblemsnot
yetunderstoodthatarecreatingafalseimpressionofaproductivity
drought.

TheHappyScenario

TheHappyScenario
Thinkaboutabusinessthatisinvestingforthefuture.Ithiresa
bunchofpeopleandopensnewofficesandbuildsnewfactories.But
whileitisdoingallthatstuff,itsactualproductivityisquitelow.Ithasa
lotofpeopleworkingalotofhours,butveryloweconomicoutputuntilits
operationsarefullyuptospeed.
Maybe,justmaybe,thatishappeningwiththeUnitedStates
economywritlarge.Businessesareaddingworkersinpreparationforthe
future,butitwilltaketimefortheirinvestmentstopayoffintermsof
grossdomesticproduct.
Theresarecentprecedentforthatpattern.Inthelate1990s,the
stockmarketwasboomingandcompaniesweremakinghugeinvestments
instaff,equipmentandinformationtechnology.Butreported
productivitygrowthwasactuallybelowthelongtermtrendonlyabout
1.7percentayearfrom1993to1998,forexample.Thenitbegansoaring
intheyearsthatfollowed,particularlyintheearly2000s.
Butheresonepieceofevidencethatthepatternofthe1990sisnot
whatisafoottoday:Businessinvestmentspendingonequipment,
intellectualpropertyandstructuresislowrelativetothesizeofthe
economy.Youdexpectthosenumberstobehigherifthiswasjusta
productivitylullastheeconomywaitsforbiginvestmentsinthefutureto
payoff.
Still,therecouldbeenoughgoingonbelowthesurfaceofthose
overallnumbersthattheoptimisticcaseremainsplausible.Touseone
example,engineersatseveralcompaniesarehardatworktryingto
perfectdriverlesscars.Atpresent,theyareasaponproductivitythey
putinmanythousandsofhoursofworkwithnoeconomicoutputtoshow
forit.Butifsuccessful,theirworkcouldradicallyincreasethenations
productivityinthedecadesahead.
Applythesameacrossawiderangeoffieldsindustrialgoods,

pharmaceuticalsandmedicine,financialtechnologyfirmsand
optimismbecomesmoreplausible.Thatsthescenarioweshouldallhope
isoccurring:Slowproductivitygrowthnowisjustadownpaymentona
muchbrighterfuture.
TheUpshotprovidesnews,analysisandgraphicsaboutpolitics,policyand
everydaylife.FollowusonFacebookandTwitter.Signupforournewsletter.
AversionofthisarticleappearsinprintonApril29,2016,onpageA1oftheNewYorkedition
withtheheadline:HiringRisesOutputLags.ItsaMystery.

2016TheNewYorkTimesCompany