Academic journal article Federal Reserve Bank of St. Louis Review

The 1990s Acceleration in Labor Productivity: Causes and Measurement

Academic journal article Federal Reserve Bank of St. Louis Review

The 1990s Acceleration in Labor Productivity: Causes and Measurement

Article excerpt

The acceleration of labor productivity growth that began during the mid-1990s is the defining economic event of the past decade. A consensus has arisen among economists that the acceleration was caused by technological innovations that decreased the quality-adjusted prices of semiconductors and related information and communications technology (ICT) products, including digital computers. In sharp contrast to the previous 20 years, services-producing sectors--heavy users of ICT products--led the productivity increase, besting even a robust manufacturing sector. In this article, the authors survey the performance of the services-producing and goods-producing sectors and examine revisions to aggregate labor productivity data of the type commonly discussed by policymakers. The revisions, at times, were large enough to reverse preliminary conclusions regarding productivity growth slowdowns and accelerations. The unanticipated acceleration in the services sector and the large size of revisions to aggregate data combine to shed light on why economists were slow to recognize the productivity acceleration.


Over the past decade, economists have reached a consensus that (i) the trend rate of growth of labor productivity in the U.S. economy increased in the mid-1990s and (ii) the underlying cause of that increase was technological innovations in semiconductor manufacturing that increased the rate of decrease of semiconductor prices. (1) This productivity acceleration is remarkable because, unlike most of its predecessors, it continued with only a minor slowdown during the most-recent recession. In this article, we briefly survey research on the genesis of the productivity rebound. We also examine the "recognition problem" that faced economists and policymakers during the 1990s when preliminary data, both economywide and at the industry level, showed little pick up in productivity growth. Using more than a decade of vintage "real-time" data, we find that revisions to labor productivity data have been large, in some cases so large as to fully reverse initial preliminary conclusions regarding productivity growth slowdowns and accelerations.

The 1990s acceleration of labor productivity has three important characteristics. First, it was unforeseen. An example of economists' typical projections during the mid-1990s is the 1996 Economic Report of the President, prepared during 1995, in which the Council of Economic Advisers foresaw no revolutionary change. The Council foresaw labor productivity growth in the private nonfarm business sector at an average annual rate of 1.2 percent from the third quarter of 1995 to the end of 2002. This estimate largely extrapolated recent experience: productivity from 1973 to 1995 had grown at an average annual rate of 1.4 percent.

Incoming data during 1995 and 1996 were not signaling an increase in productivity growth. Gordon (2002, p. 245) notes that economists in 1997 were still seeking to identify the causes of the post-1973 slowdown in productivity growth: "Those of us who participated in panels on productivity issues at the January 1998 meetings of the American Economic Association recall no such recognition [of a productivity growth rate increase]. Rather, there was singular focus on explaining the long, dismal period of slow productivity growth dating from 1972." (2) Today, with revised data, we know that the productivity acceleration started before 1995.

Labor productivity growth showed its resilience by slowing only modestly during the mild 2001 recession. Forecasters adopted new views of the trend. By 2001, the Council of Economic Advisors had increased its projection of the annual growth of structural labor productivity to 2.3 percent per year. Other forecasters, including many in the Blue Chip Economic Indicators and the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters, were even more optimistic. (3) Yet, since the March 2001 National Bureau of Economic Research (NBER) business cycle peak, labor productivity has been stronger than both these upward-revised forecasts and its average following past cyclical peaks; the latter point is illustrated in Figure 1. …

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