Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Has the Productivity Trend Steepened in the 1990s?

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Has the Productivity Trend Steepened in the 1990s?

Article excerpt

In the 1990s, conventional measures of productivity growth, or the growth in output per worker, have indicated a dramatic rise. If these measures are correct, the economic benefits are clear. In the short run, sustained, faster productivity growth would enable the economy to expand more rapidly without intensifying inflationary pressures. In the long run, sustained, faster productivity growth would boost real incomes and improve the standard of living. Since 1960, for example, productivity advances have helped the typical worker produce 70 percent more output per hour, more than doubling personal incomes.

Despite signs that productivity has recently begun to follow a steeper path, some analysts are skeptical. Episodes of faster productivity growth in the past have often reflected cyclical influences rather than fundamental trend shifts. And, the conventional productivity measure, which is based on fixed-weighted productivity data, has recently shown an upward bias.

To address these concerns, this article reexamines the conventional, fixed-weighted productivity measure and also uses a new chain-weighted measure to assess productivity growth. The first section of the article summarizes the empirical evidence and describes the theoretical arguments in support of the view that the trend of productivity has steepened. The second section challenges this view of productivity in three parts. The first part challenges the theoretical arguments. The next part suggests the standard statistical tests overstate the significance of the apparent increase in the trend of productivity because they disregard cyclical influences. The final part describes the recent bias of the conventional, fixed-weighted data and shows that statistical analysis using the new chain-weighted data sharply contradicts the steeper trend view. Based on this analysis, the article concludes that the productivity trend has not steepened in the 1990s.

ARGUMENTS SUPPORTING THE STEEPER TREND VIEW

The case for a steeper productivity trend is supported by both empirical evidence and theoretical arguments. Empirically, standard statistical tests suggest that productivity gains in the current expansion have exceeded the typical cyclical improvements in productivity. Theoretically, several factors could have caused such a fundamental shift in long-run productivity.

Statistical evidence of a steeper productivity trend

Recent data suggest that productivity may be following a new, steeper trend. Nonfarm business productivity has grown at an annual rate of just under 2 percent in the 1990s, up from the roughly 1 percent rate in the previous two decades. This growth is notable because in this expansion, which began in the first quarter of 1991, productivity growth has expanded more rapidly relative to output growth than in other postwar expansions.(1)

Formal statistical analysis supports the view that productivity has begun to follow a new, steeper trend. Chart 1 shows conventionally measured nonfarm business productivity and the estimated linear trends it has followed since 1960. (Chart 1 omitted) The trends ignore cyclical influences and grow at different rates starting in 1972:Q4, 1982:Q1, and 1990:Q4, dates which standard statistical tests identify as statistically significant breakpoints. These breakpoints reveal four subperiods of trend productivity (see appendix for description of statistical methodology to identify breakpoints). Long-run productivity grew most rapidly before 1973, slowed dramatically in the 1970s, edged up in the 1980s, and now in the 1990s appears to be climbing moderately.(2) To highlight the steeper current trend, the dashed line in the chart extends the linear trend established in the first quarter of 1982. The divergence of the solid and dashed lines in the 1990s illustrates the apparent steeper trend of 1.7 percent currently being followed, up from a rate of 1.0 percent earlier.(3)

Factors causing the steeper productivity trend

Economists who support the steeper trend view routinely cite three factors underlying the sharp productivity rise in the 1990s. …

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