Academic journal article Economic Inquiry

The U.S. Productivity Slowdown: A Peak through the Structural Break Window

Academic journal article Economic Inquiry

The U.S. Productivity Slowdown: A Peak through the Structural Break Window

Article excerpt

I. INTRODUCTION

Productivity (total and labor) plays a prominent role in theories of economic growth, business cycles and labor demand. It is also widely accepted that productivity growth, whatever its cause, is a key determinant of the rate of increase in per capita output and living standards. It is thus not surprising that the productivity slowdown in the United States and elsewhere since the early 1970s continues to be a significant source of concern to economists and policy makers. According to one recent estimate, the slowdown has reduced current consumption by nearly 30%.(1) The productivity slowdown experienced in the United States during the post-war period is far from unique since many other industrialized countries have experienced a similar slowdown. More important, the severity of the productivity decline in the United States appears to be mild in comparison to other countries. While these observations are often made to emphasize that the problem faced by the U.S. is far from unique or severe, the concerns about competitiveness and the perceived decline in living standards in the United States have generated a rather pronounced and persistent negative reaction from the media as well as from some politicians. A possible explanation for the pronounced reaction in the United States to the productivity decline may largely be due to the persistent trade deficits being experienced by the country. There is a perception that the productivity slowdown will have an adverse long term effect on living standards.

Evidence based on growth accounting methods, to be reviewed later on in the paper, supports the view that reduced productivity growth was the primary factor for the slowdown of output growth in the U.S. and a number of other countries. This evidence is particularly important in that it absolves slower growth of inputs such as capital or labor as contributing factors of a slowdown in output growth. However, it introduces a puzzle as to what caused a slowdown in productivity since about 1973. While the causes and consequences of the productivity slowdown in the United States have been extensively analyzed, the slowdown continues to remain somewhat of a puzzle. Specifically, a wide variety of explanations have been offered for the productivity slowdown, with little consensus as to a clear-cut culprit. Moreover, the productivity slowdown appears to be at odds with a number of recent models of economic growth. We will have more to say about these issues later on in the paper. For the time being it suffices to say that most studies appear to informally support the view that a productivity slowdown did take place during the 1970s. The argument is so pervasive that the slowdown is often accepted as a stylized fact.

This paper has two objectives. The first objective is to present empirical evidence based on post-War annual data from 1947-1992 in support of the premise that the time series of the logarithmic level of the labor productivity variable in the United States (hereafter labor productivity) is not a difference-stationary process. Pretesting for unit roots in productivity in order to assess its long-run features is important due to the importance which the presence of a unit root can have for economic forecasting, macroeconomic modeling using the cointegration framework, and tests of Granger causality. We will present formal tests evidence that both supports and refutes the claim that the log-level labor productivity is a first-difference stationary process. The support for the null hypothesis of a unit root process in the labor productivity variable - against the alternative hypothesis of a linear trend stationary process - is found when the familiar Dickey-Fuller test is applied. However, a valid use of the conventional Dickey-Fuller test requires assumptions that the regression utilized for the test is correctly specified, which may not hold if the premise of a productivity slowdown is accepted. …

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