Many forecasts are calling for a prolonged slowdown in the US economic growth rate, driven by the twin forces of demographic decline and stagnant worker productivity. It’s undeniable the workforce is aging. With baby boomers retiring, the available pool of workers is growing more slowly than in previous decades. However, labor productivity may not be as grim as metrics appear to indicate. In fact, there’s good reason to believe that innovation is causing productivity to climb faster than official GDP measures can capture.
From 1900 to 1973, waves of industrialization and urbanization generated 3 percent to 4 percent productivity gains almost every year. In 1970, Congress passed the Clean Air Act, which established regulations that led to improvements in the quality of the environment, but also slowed business activity. As the regulations took effect, labor productivity growth declined to about 1.5 percent annually from 1973 to 1995.
The telecom and information technology (IT) boom helped boost productivity growth to a 3 percent annual average between 1995 and 2004; but since then, the workforce has entered a dramatic and sustained productivity slowdown. Since 2010, labor productivity has increased at a 0.5 percent annual pace.
This slowdown is puzzling. As a leaner, more efficient, better educated and more technologically sophisticated workforce emerged from the recession, a productivity surge should’ve ensued. Perhaps productivity has rebounded more than the metrics indicate, as official GDP measurements don’t appear to fully capture the productivity gains of the digital era.
Productivity growth is difficult to predict. It’s largely driven by technological progress, which occurs in uneven bursts as incremental advances give way to market-changing breakthroughs. The present pace of labor productivity growth likely has little bearing on its future direction. Already, fields like artificial intelligence and robotics are reshaping a handful of industries, and they’ll likely continue to revolutionize the way the workforce operates.
With entitlement programs such as Social Security and Medicare reliant on GDP growth to sustain their funding, the US will need a more productive workforce to support its aging population. While the current metrics point to a disappointing trend, the accelerating pace of innovation will likely lead to new jobs and better living conditions. And as GDP measurements evolve, we’ll likely see a more positive productivity trend emerge.
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