Two Points on Productivity

Conor Sen is right in his observations at Bloomberg that faster economic growth will require increased productivity:

Economic growth is a function of two factors: more hours worked and how much more efficient, or productive, an economy is. Although the U.S. now has an aging population, a falling birthrate and less immigration than in the past, the level of job growth and hours worked during the past decade has been robust because of just how high unemployment was. In this environment, the fear that robots would displace workers proved unfounded.

It’s now been 10 years since unemployment peaked at 10% in October 2009. Since that time, total employment in the U.S. has increased by 20 million. During that same period, the number of unemployed workers has fallen by 9.5 million, from 15.3 million to 5.8 million. In other words, about half of all job growth in the past decade has come from getting unemployed people back to work.

So future economic growth is probably going to have to come from somewhere other than the unemployed. Maybe a tight labor market can draw more people into the workforce — we’ve seen some of that during the past few years — but at some point that hits a limit, too. Ultimately, what we need is faster productivity growth.

I don’t know what Mr. Sen learned in school but back in the olden days when I took economics classes we were told that increases in productivity require investment. That can come from two source: the government and individuals in the form of education and businesses in the form of new equipment and processes.

The increase in investment in education over the last 30 years has been impressive—more than 375% in real terms. Right now the per student spending on education is the highest in history:

Given lagging productivity growth despite all of that educational spending, I don’t think it’s much of a stretch to conclude that there’s little or no relation between educational spending and productivity growth.

That means that, if we are to see more economic growth, businesses will need to invest more. I have been harping about that since the early Aughts. Businesses just don’t see the need or at least the benefit. Incentives will need to change.