US Worker Productivity In Serious Decline — The Reasons Why

by Gary D. Halbert
August 23, 2016

  1. US Worker Productivity Falls Again, Worst Showing Since 1979
  2. How Productivity Affects Economy, Incomes & Living Standards
  3. Possible Reasons For the Decline in US Worker Productivity
  4. The Productivity Conundrum: Could the Data be Wrong?
  5. Looks Like I’ll Be a First-Time “Father-In-Law” Next Year


The Labor Department reported earlier this month that US worker productivity, which measures hourly worker output, declined for the third consecutive quarter at the end of June, the worst showing since the late 1970s. The productivity rate also declined for the 12 months ended June. This news came as a surprise to most forecasters who were sure that the productivity rate would have snapped back strongly in the 2Q.

There is near-universal agreement among economists that worker productivity is the most important determinant in whether our incomes and living standards rise or fall over the years. If productivity continues to fall, the economy will be hamstrung, incomes will stagnate and our living standards will deteriorate in the years ahead.

Interestingly, there is not near-universal agreement on what is causing the current extended period of falling productivity, nor what should be done to reverse this critical trend. Today I will devote this space to explaining why productivity is moving in the wrong direction and what should, and should not, be done about it.

Given the enormous impact productivity has on our economy, our incomes and our living standards, I would hope that more Americans understand this issue better before they head to the polls in what will be the most critical presidential election in many years. Therefore, feel free to forward today’s E-Letter to as many people as you see fit.

US Worker Productivity Falls Again, Worst Showing Since 1979

US non-farm worker productivity unexpectedly fell in the second quarter, pointing to sustained weakness that could raise concerns about corporate profits and companies’ ability to maintain their recent robust pace of hiring.

The Labor Department said earlier this month that productivity, which measures hourly output per worker, dropped at a 0.5% annual rate in the April-June period. That followed a decline of 0.6% in the 1Q and -1.7% in the 4Q of last year. It was the third consecutive quarterly decline, the longest such stretch of declines since 1979. Over the last 12 months ended June, worker productivity fell 0.4%, the fastest year-over-year pace of decline in three years.

US Worker Productivity

After rising rapidly in the 1990s as computers made workers more efficient, productivity has fallen as companies have been reluctant to invest in new equipment in the past several years, given the outlook for sluggish economic growth globally. Productivity has increased at an annual rate of less than 1.0% in each of the last five years, less than half the historical rate.

The latest government revisions to worker data going back to 2013 also confirmed the softening productivity trend, even though strong employment gains have helped to raise output overall with US payrolls growing by more than 500,000 jobs in June and July combined.

The reason the economy has still been able to expand modestly is because of the strong labor market. Firms are hiring people at a reasonably healthy rate, as evidenced by the very low unemployment rate (4.9%), but most economists say this can’t last because weak productivity signals a further deterioration in corporate profit margins going forward.

The current trend of falling worker output is a serious problem because in the long-run higher incomes and rising living standards depend on rising productivity. So are we destined for lower incomes and falling living standards? Maybe, but there are some outstanding questions. Let’s first take a look at the relationship between worker productivity and incomes and living standards.

How Productivity Affects the Economy, Incomes & Living Standards

Over the long haul, technological progress raises productivity, which in turn generates higher wages and living standards. The question is, can we continue to increase productivity indefinitely? The answer is YES, assuming that technology continues to advance as it has over the last century or longer.

US Worker Productivity

Productivity, therefore, is really one of the main numbers in the economy that we unambiguously want to be going up. Even if you don’t want people to be consuming so much (inflation fears), you still want this number going up – because it means that people can take more leisure time (vacations, etc.) while still producing the same amount of goods and services.

For many years, economy-wide productivity growth and wage growth have tended to have a one-to-one relationship. When productivity rose rapidly, as it did in the period from 1945 to 1973, wages also rose rapidly. When productivity growth flattened out, as it did between 1973 and 1995, wage growth also stagnated.

Yet in the US over the past 20 years, the tight relationship between productivity growth and wage growth has broken down. Wage growth has fallen behind productivity growth. Economists debate why this breakdown has happened, and how long the situation might last.

Some point to the rising cost of non-wage benefits, such as health insurance, which employers have increasingly provided to their workers in recent decades. Others point to the fact that we’ve had two severe recessions since 2000 as the reason for sluggish wage growth.

But none deny that, over the long-term, a healthy rate of productivity growth is a requirement for a further rise in living standards. Or that an anemic rate of productivity growth is a recipe for stagnation and class conflict.

For example, between 1947 and 1973, output per hour (the standard measure of labor productivity) rose at an annual rate of about 3%. Then, between 1974 and 1995, the rate of productivity growth fell by half, to 1.5%. Not coincidentally, this was the period when wage growth started to stagnate.

Things started to improve after 1995. For a decade or so, perhaps owing to the development of the Internet, the rate of productivity growth returned to about 3%, and wages started to rise again. Optimists predicted a bright future – one that unfortunately didn’t materialize.

Possible Reasons For the Decline in US Worker Productivity

Since 2007, the annual rate of productivity growth has averaged only about 1.3%. Since 2010, it has been even lower, at about 0.5%. According to the latest figures, in the twelve months that ended in June, the growth rate of output per hour was negative 0.4%. So what could be the causes of this serious trend?

Before we get to that, I should mention that the decline in worker productivity hasn’t been restricted to the United States. Something similar has happened in countries like Japan, Germany, France and the United Kingdom. Whatever is driving the slowdown in productivity growth, it appears to be affecting the advanced world as a whole.

One likely explanation for the global decline in productivity is the decline in business investment spending (capital expenditures) on such things as plants, equipment, tooling, hardware, software and other technology. Since the Great Recession, many businesses have been scrimping on capital investments, preferring to hoard cash or spend it on stock buybacks.

There is a growing theory that as long as the Fed and

1, 2  - View Full Page