Academic journal article ABA Banking Journal

Labor Productivity Growth: Miracle or Mirage?

Academic journal article ABA Banking Journal

Labor Productivity Growth: Miracle or Mirage?

Article excerpt

The recent acceleration in labor productivity growth (measured as output per hour) has inspired talk of a "productivity miracle."

One benefit of faster productivity growth has been a sizable jump in inflation-adjusted wages. Productivity growth means wage increases are not necessarily inflationary.

Another benefit of rapid productivity growth is that it helps limit the adverse impact of higher wages on corporate profits. Rising productivity growth results in unit labor costs (labor costs adjusted for productivity) growing more slowly or even falling, which helps keep higher wages from reducing business profits.

Nonfarm labor productivity increased by 4.9% annually during the third quarter of 1999. The 2.6% average annual productivity growth from 1995 through the third quarter of 1999 is more than twice the average growth recorded between 1974 and 1995.

The recent acceleration in productivity growth has been fueled by companies' increased spending on computer equipment and information-processing technology, an increased emphasis on both on-the-job training and the teaching of technical skills in schools, and international competitive pressures.

An important question yet to be answered is whether these recent productivity gains reflect a permanent shift toward higher productivity growth or simply mark a transitory period after which productivity growth will revert back toward its lower long-term average of 1.0%.

Only time will tell whether we have embarked on a path of permanently higher trend productivity growth; that is, whether the U.S. economy is experiencing a productivity miracle or mirage. While I lean towards accepting the proposition that productivity growth is permanently higher, it remains to be seen how productivity will respond to the eventual slowdown in economic growth.

One variable that may infringe on future productivity gains is the run-up in the price of crude oil to over $25 per barrel.

While the U.S. economy relies less on equipment and technology driven by oil, there is still a large industrial sector, as well as our travel industry, that depends heavily on oil. …

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