Why Americans workers are becoming less productive

The recent trend lines point to a deep sickness in the U.S. economy

American productivity is not on the way up.
(Image credit: Simone Golob/Corbis)

The recent British election was fought almost entirely over which party could better demonstrate its commitment to murdering the deficit. But the real economic problem for that nation is something else entirely: productivity.

As economist Simon Wren-Lewis demonstrates, productivity has declined somewhat under the five-plus years of Conservative government — a result basically unprecedented in U.K. history since World War II at least. Let's call it the "British disease."

Productivity is economic output per hour worked, and it's one of the best ways to measure the prosperity of a country. High productivity means more potential for both wealth and leisure, since one can produce the same amount with less work. Stagnant or falling productivity means the opposite — particularly troubling in nations that are getting older, like the U.K.

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So why should Americans care? Because it appears that the U.S. is getting a case of the British disease. After a huge spike following the Great Recession, productivity growth has fallen to historically low levels. For the first quarter of 2015, the Bureau of Labor Statistics reported that productivity actually fell at a 3.1 percent annual rate.

First, we should make clear that slowing productivity is exactly the opposite of the "robots will take all the jobs" worry that regularly crops up in the media. That would imply a productivity acceleration beyond anything ever experienced, such that eventually all economic output was being produced by only a handful of workers. But what we are currently experiencing is the opposite. Employment growth has been relatively strong, but output weak — and thus output per hour worked is down.

As economist Jared Bernstein points out, there are several theories economists have brought to bear on this question. Perhaps the rate of technological progress has slowed. Perhaps corporations aren't investing enough in productivity-enhancing capital goods. Perhaps technological knowledge hasn't slowed, but it's just not diffusing properly throughout the economy.

However, I'd like to focus on one of Bernstein's suggestions in particular: weak aggregate demand. In 2015, we are seven years out from the worst economic crisis in 80 years. And though things have improved greatly since 2010, the problem is still not even close to being fixed. What's more, the economy never really recovered from the dot-com collapse — the late 1990s boom was the last time the U.S. saw a really high-pressure economy, with anything that might be called sustained full employment.

Whatever one's pet theory about how to increase productivity, it almost has to be the case that a tight labor market plays a role. Full employment — in which good employees are scarce and must be paid well — provides a powerful impetus towards increased productivity. (As economists say, incentives matter.) Anecdotally, a slack economy has made employers extremely lazy about worker training, since they have been getting the pick of the litter for years now.

Already the theorists are wading through the data, pitting one theory against another. That's a worthwhile enterprise. But economic modeling is a tricky, easily gamed enterprise. At a very minimum, this question will not be affirmatively settled either for Britain or the U.S. until full employment is reached.

In one sense, that's actually helpful for policymakers. Despite what Silicon Valley says, we are utterly clueless about how to increase the rate of technological progress. Increasing corporate investment is a good bet, but still not guaranteed.

Weak aggregate demand, by contrast, is both one of the most plausible explanations for the drop in productivity and a complete no-brainer to fix. You just dump money into the economy (literally) until inflation starts to kick up, and then back off. It's really that simple.

In a sane world, that logic would spark an immediate policy experiment to see if we could strengthen the economy and create millions of jobs. If not, well, strike one theory off the productivity list. Instead we'll do nothing, and continue to wring our handkerchiefs. But on the off-chance that, say, a politician who hasn't been captured by the austerity mindset wins the White House, it's worth noting that one of the most troubling economic problems might be solved essentially for free.

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