ECONOMIC GROWTH Part II

II. PRODUCTIVITY AND ECONOMIC GROWTH

Productivity Productivity is defined as: AMOUNT OF OUTPUT AMOUNT OF INPUT Although we can attempt to measure the productivity of any input, it is not always easy to do so.

TOTAL FACTOR PRODUCTIVITY Economists use Total Factor Productivity (TFP) to measure the overall productivity of an economy. TFP = ECONOMY’S OUTPUT STOCK OF LABOR & CAPITAL

TOTAL FACTOR PRODUCTIVITY TFP is an attempt to measure how well the people of a country use their resources. It is not easy to measure.

TOTAL FACTOR PRODUCTIVITY A more sophisticated way to measure economic growth involves TFP: Economic growth = GROWTH RATE OF TFP + GROWTH RATE OF RESOURCES

TOTAL FACTOR PRODUCTIVITY Formally, Economic Growth is a function of: %^Y = %^TFP +.70(%^L) +.30(%^K)

TOTAL FACTOR PRODUCTIVITY %^Y = Percentage Change in Real GDP %^TFP = Percentage Change in Total Factor Productivity %^L = Percentage Change in Size of Labor Force %^K = Percentage Change in Capital Stock

TOTAL FACTOR PRODUCTIVITY In other words, economic growth depends upon changes in the productivity of all inputs in the economy + changes in the number of people working + plus changes in the size and type of capital goods used.

III. THE U.S. PRODUCTIVITY SLOWDOWN

The US Productivity Slowdown: Some Causes Economists and others have become worried about the slow down in productivity in the United States. They have advance a number of explanations.

The U.S. Productivity Slowdown 1)Education level of the workforce 2)Quality of education 3)Demographic change 4)Technological innovation 5)Energy prices 6)Manufacturing vs. services

Education Level By education level, we mean the average level of education. Clearly not the case, since people have become more educated in the last 30 years.

Quality of Education SAT scores have been used to show that students are less well educated and knowledgeable than before. Possibly true, but not necessarily measured by SAT scores. Very hard to measure quality of education.

Demographic Change The story of the baby boomers entering the labor market as inexperienced and not very productive. A small part of the problem, because the timing of when productivity fell and when boomers entered the labor market doesn’t mesh.

Technological Innovation It has been argued that there was less innovation and inventiveness in that period. If we measure innovation by number of patents issued, there certainly was less. But why?

Energy Prices The oil price hikes of the 1970’s caused two global recessions. Definitely contributed to economic slowdown and productivity slowdown.

Manufactures vs. Services It is much easier to measure productivity in manufacturing than in the service sector. Clearly some of the problem is in measuring productivity.

Manufactures vs. Services A big piece of the puzzle is that services are much more resistant to improvements than is manufacturing. As the US shifted to a post manufacturing economy, it was inevitable that productivity would slow down.

Final Thoughts 1)Productivity of factory workers in the U.S. rose continuously in this period. 2) Productivity of office and service sector workers, difficult to measure, rose slowly. 3) Part of the drop was due to the shift from manufactures to service sector. 4) Part was due to the energy crisis.

Final Thoughts Bottom line: we still don’t know completely what happened to productivity in the US!