What explains the slowdown in labor productivity in the 1970s? Based on the
study of detailed industry- level data on labor productivity, William Nordhaus.
Microeconomia David A. Besanko, Ronald R. Braeutigam Copyright © 2009 – The McGraw-Hill Companies srl Microeconomia 2/ed David A. Besanko, Ronald R. Braeutigam © 2012 McGraw-Hill
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A P P L I C A T I O N
PRODUCTION FUNCTIONS WITH A SINGLE INPUT
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The Resurgence of Labor Productivity in the United States When the average product of labor is computed for an entire economy—say, that of the United States—what we get is a measure of overall labor productivity in the economy. Labor productivity is an important indicator of the overall well-being of an economy. Rising labor productivity implies that more output can be produced from a given amount of labor, and when that is the case, the standard of living in the economy rises over time. By contrast, when the growth of labor productivity stalls, improvements in the standard of living will slow down as well. The accompanying table shows the average annual growth in labor productivity in the United States between 1947 and 2005.4 The table reveals a striking pattern: from 1947 through 1970, labor productivity grew at an annual rate between 2.6 and 2.7 percent. However, in the 1970s, 1980s, and the first half of the 1990s, the growth of labor productivity slowed significantly, falling to a rate of about 1.6 percent annually. But suddenly in 1995, there was a resurgence of labor productivity, with annual growth rates between 1995 and 2005 averaging about 2.9 percent. Keeping in mind that the 1995–2005 period encompassed 9/11, the technology meltdown, the recession of 2001, and numerous corporate governance scandals, the growth of labor productivity over this period is impressive indeed. Growth in Labor Productivity in the United States, 1947–2005 Years 1947–1960 1960–1970 1970–1980 1980–1990 1990–1995 1995–2005
Annual Growth Rate in Labor Productivity 2.63% 2.74% 1.71% 1.61% 1.54% 2.92%
What explains the slowdown in labor productivity in the 1970s? Based on the study of detailed industrylevel data on labor productivity, William Nordhaus finds that the largest slowdowns in productivity growth were in energy-reliant industries such as pipelines, oil and gas extraction, and automobile repair services.5 This suggests, then, that the primary culprits in the slowdown of productivity growth in the United States were the oil shocks of 1973 and 1979. As Nordhaus puts it, “In a sense, the energy shocks were the earthquake, and the industries with the largest slowdown were nearest the epicenter of the tectonic shifts in the economy” (p. 30). To explain the resurgence of labor productivity since 1995, it is useful to identify the factors that would tend to make workers more productive. One important factor that can affect labor productivity is the amount and sophistication of the capital equipment available to workers. The period between 1995 and 2005 was one of rapid growth in the sophistication and ubiquity of information and communications technologies, so the hypothesis that the post–1995 resurgence of labor productivity is attributable to increases in the quantity and quality of capital (what economists call “capital deepening”) is quite plausible. A second factor affecting the productivity of labor is the increase in the quality of labor itself. Improvements in aggregate labor quality occur primarily when the ratio of high-skill to lower-skill workers increases, which in turn occurs as firms demand higher levels of experience and education from their workers (which, of course, is related to the increased sophistication of the capital that workers are asked to work within their jobs). So what does explain the resurgence of U.S. productivity growth since 1995? According to an analysis by Dale Jorgenson, Mun Ho, and Kevin Stiroh (JHS), the most important factor was capital deepening.6 Indeed, JHS find that capital deepening explains more than half of the jump in the labor productivity growth rate between 1970–1995 and 1995–2005. As one
4
The growth rates were calculated from changes in output per hour in all nonfarm businesses in the United States. This data is available from the Bureau of Labor Statistics Web site, http://data.bls.gov/ cgi-bin/dsrv (August 2, 2006).
5
W. Nordhaus “Retrospective on the 1970s Productivity Slowdown,” NBER Working Paper 10950 (2004). D. Jorgenson, M. Ho and K. Stiroh “Will the U.S. Productivity Resurgence Continue?” Current Issues in Economics and Finance, 10, no. 13, Federal Reserve Bank of New York (December 2004): pp. 1–7.
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