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Productivity Growth: Key to the Post-Pandemic Future

When the first reading of second quarter U.S. GDP growth is released in late July, and for several quarters after that, we will be staring at economic growth numbers that no one has ever seen before. In terms of magnitude and volatility these upcoming data will be a unique experience for economists, policymakers and market participants. While we study them we should remember that the contour of recovery from what is certainly the deepest plunge in U.S. economic growth of modern times is less important than a more fundamental issue: What is the U.S. economy’s underlying, sustainable growth rate? Take away pandemics, financial crises, “normal” recessions and recoveries, wars and social unrest.  Economically speaking, the big issue is what we can really do beyond the L, the V or the W that is the subject of current arguments among forecasters.

Given our new needs, I hope that we are not going to settle for a return to modestly above two percent growth. Among other things, I question whether this is anywhere near sufficient to absorb massive unemployment and incentivize the entrepreneurship that we very much need to heal from the wounds of 2020. The U.S. needs to actively start thinking about how to raise its long-term sustainable growth.

The equation for an economy’s growth potential is simple. It is the sum of the growth of labor hours and the growth of labor productivity. The former is a problem. We can’t do much about the decline in labor hours. Birth rates are falling and the labor force participation rate is in a secular decline. Thus, our only chance of getting to a better place with our economic growth potential is through productivity.

Labor productivity is a simple concept with a complex dynamic. It is defined as the output per hour of all workers. Over the past decade, labor productivity performance has been a source of growing concern. For the economy as a whole it was, prior to the pandemic, showing modest improvement from a weak period.  Labor productivity growth in manufacturing was suffering through years of significant weakness, not what we want to see for the future of U.S. global industrial competitiveness.

My research shows that innovation investment, capital investment and the labor force participation rate of workers with a B.A. degree and higher are the key drivers of productivity performance in the manufacturing sector, although with varying degrees by industry. Through the high drama of the moment, there are many new and semi-new factors that are impacting or will impact labor productivity growth throughout the economy. The costs and challenges of social distancing, increased reliance on technology, more working from home, a larger role for government in the economy, greater investment in basic science, greater investment in under-served communities and educational disruptions will all matter. The pressure for public and private innovation that many of these variables could bring about might ultimately be beneficial for productivity performance. It’s not going to happen by accident, however. We have to meet the moment.

The path of labor productivity growth will dictate the path of economic growth beyond the pandemic-induced crash. As a nation that is yearning for full recovery, we can’t just target our policies toward a return to the pre-pandemic sluggishness. We need to have a well-defined and active policy program for labor productivity growth acceleration.

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