From the Federal Reserve Bank of Atlanta's Macroblog:
The Atlanta Fed recently released its online Annual Report. In his video introduction to the report, President Dennis Lockhart explained
that the economic growth we have experienced in recent years has been
driven much more by growth in hours worked (primarily due to employment
growth) than by growth in the output produced per hour worked (so-called
average labor productivity). For example, over the past three years,
business sector output growth averaged close to 3 percent a year. Labor
productivity growth accounted for only about 0.75 percentage point of
these output gains. The rest was due primarily to growth in employment.
The recent performance of labor productivity stands in stark contrast
to historical experience. Business sector labor productivity growth
averaged 1.4 percent over the past 10 years. This is well below the
labor productivity gains of 3 percent a year experienced during the
information technology productivity boom from the mid-1990s through the
mid-2000s.
John Fernald and collaborators at the San Francisco Fed have decomposed labor productivity growth
into some economically relevant components. The decomposition can be
used to provide some insight into why labor productivity growth has been
so low recently. The four factors in the decomposition are:
- Changes in the composition of the workforce (labor quality), weighted by labor's share of income
- Changes in the amount and type of capital per hour that workers
have to use (capital deepening), weighted by capital's share of income
- Changes in the cyclical intensity of utilization of labor and capital resources (utilization)
- Everything else—all the drivers of labor productivity growth that
are not embodied in the other factors. This component is often called
total factor productivity.
The chart below displays the decomposition of labor productivity for
various time periods. The bar at the far right is for the last three
years (the next bar is for the past 10 years). The colored segments in
each bar sum to average annual labor productivity growth for each time
period.
Taken at face value, the chart suggests that a primary reason for the
sluggish average labor productivity growth we have seen over the past
three years is that capital spending growth has not kept up with growth
in hours worked—a reduction in capital deepening. Declining capital
deepening is highly unusual....MORE
