The US economy is currently in a low labor productivity regime, averaging just 0.6% growth since 2011 and productivity is not going to improve anytime soon, that’s according to Joseph Song US Economist at Bank of America.
Labor Productivity Growth: Underpressure
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Today, there are multiple factors affecting labor quality. On the one hand, the share of the prime-age workers is declining as Baby-Boomers begin to retire. On the other hand, a greater share of workers are obtaining college degrees or higher, and the trend looks broadly positive. What’s more, technological developments should make each worker more efficient, which should translate into more output per hour.
However, since the great recession, the pace of capital investment has slowed, and more recently, businesses have placed investments on hold, as they wait to see if Congress passes corporate tax reform. In the industrial sector, capacity utilization remains well below pre-recession levels, and overall capital formation is only modestly outpacing depreciation. Still, Song points out that IT services have helped improve productivity for non-store retailers. In fact, according to the BLS, labor productivity growth for non-store retailers has averaged 5.6% over the last five years, well above the aggregate pace.
Multifactor productivity, which measures the output per unit of capital and labor input, has improved markedly in certain industries over the past five years. Oil and gas extraction has been the largest beneficiary with an integrated MFP gain of 7.2%. Other sectors have struggled even to achieve growth of 1%.
Overall, the outlook is bleak:
“The prospects of returning to a high-productivity regime and seeing better potential growth in the near term seem limited. In fact, the risks are likely skewed to the downside to our already low estimate for potential growth of 1.7%. Demographic trends are unfavorable, and businesses appear to be in a “wait and see” mode on capital spending. Multifactor productivity remains an unknown factor: the trend doesn’t look too promising, but broad diffusion of new IT products could lead to some modest productivity gains in the short run before seeing greater gains once the potential is fully realized. Until then, we remain comfortable with our call for productivity growth to stay subdued and growth to hover around 2% over the next several years.”