U.S. Productivity: What Is It, How to Calculate It
Why You're Working Harder But Feel Like You're Earning Less
Definition: Productivity is the ratio of goods and services created by a certain amount of workers and capital. High productivity creates more output with less input. It's more valuable because it creates greater profit. It gives the company, industry or country an advantage over their competitors.
Businesses analyze productivity in processes, manufacturing and sales to improve the bottom line. Governments use productivity measures to evaluate whether laws, taxes and other policies increase or impede business growth.
Central banks analyze productivity to see how well the economy is using total capacity. If productivity is low, then the economy is in recession. If capacity utilization is high, then the economy may be in danger of inflation. For these reasons, productivity growth is desired. (Source: "Defining and Measuring Productivity," OECD.)
How to Calculate Productivity
Productivity is a ratio that describes the output divided by the input, or Productivity = Output / Input. You can increase productivity by either increasing output or decreasing input.
The most frequently used ratio measures the productivity of labor in a country. It's calculated as Labor Productivity = Gross Domestic Product / Hours Worked. The Bureau of Labor Statistics measures hours worked by employees, proprietors, and unpaid family workers. It also uses an index for both GDP and hours worked. (Source: BLS, Technical Information About the Labor Productivity Measures, March 11, 2008)
In 1994, Nobel prize-winner Paul Krugman summarized most economists' views about the importance of the standard measure of productivity:
Productivity isn't everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. The Age of Diminishing Expectations
U.S. Productivity Trends
Productivity was robust from the Civil War until 1973, averaging between 2 percent to 3 percent. There were three growth spurts.
Between 1870 and 1900, average productivity increased 2 percent a year. That was because of increased life expectancy that allowed workers to live longer. Technology, such as railroads, telegraphs and the internal combustion engine, also helped workers produce more.
During the 1920s and 1930s, productivity increased 2 to 3 percent annually. Innovations abounded in in electricity generation, internal combustion engines and telecommunications. There were new petrochemicals, including fertilizers for agriculture, plastics and pharmaceuticals. In the 1920s, productivity gains in manufacturing averaged 5 percent a year.
Between 1940s and 1973, the growth spurt continued. Productivity gains were 1.5 percent to 2 percent a year as innovations spread throughout the country. Contrary to popular opinion, the World War II effort didn't improve productivity in anything other than medical care.
Productivity slowed until the period 1995 through 2004. That's when it increased between 1 percent and 1.5 percent thanks to information technology. (Source: "Total Factor Productivity Growth in Historical Perspective," Congressional Budget Office, March 2013.)
From 2007 to 2012, productivity averaged 1.8 percent, as workers who weren't laid off during the recession had to produce more. (Source: "Productivity in the Non-Farm Business Sector, 1947 - 2012, " Bureau of Labor Statistics.)
Productivity in the second quarter of 2016 by a 0.5 percent annual rate. That's because output rose 1.5 percent, but hours worked rose 1.8 percent. That was due to the decline in oil production, especially shale oil. As prices fell in 2015 and 2016, companies laid off workers. That lowered overall productivity because the industry is nearly two and a half times more productive than the average job. That's according to an April 2016 study from the Federal Reserve Bank of Kansas City. (Source: "Why Did Productivity Fall?" The Wall Street Journal, August 9, 2016. "Productivity," Bureau of Labor Statistics.)
Income Hasn't Kept Up
Something's happened to productivity in America that untied it from a rising standard of living. The 2008 financial crisis aggravated this trend. Between 2000 and 2012, the average household lost 6.6 percent in income after inflation was taken into account. The average median household income was $51,371 a year in 2012, compared to $55,030 in 2000. The Labor Department reported that real compensation only increased 0.3 percent in 2013. For more, see U.S. Average Income Levels. (Source: "Labor Productivity Report," Wells Fargo, Q3 2013. "Real Earnings Report," BLS.)
As output increased it didn't translate to an equal increase in workers' standard of living. Instead, it went to the owners of capital. Corporate profits reached an all-time high in 2013. They were 12.53 percent of GDP up from 7 percent in 2000. That means corporations got a bigger slice of output, while workers received a smaller slice. For more, see Income Inequality in America. (Source: "Corporate Profits at All-Time High," Econo, September 26, 2013.)
Thank Robots and Foreign Workers
One reason wages haven't risen is because higher productivity no longer leads to more jobs, as it did until 2000. Job growth has been stagnant since then. This forced workers to accept lower wages to keep their jobs.
One reason for this is the impact of increased automation at factories and service industries. Secretaries have been replaced by computers, bank tellers by ATMs, and bookkeepers by software. The fastest growing jobs are now in software engineering and computer support. Even in factories, robots have replaced workers, as 320,000 robots have been bought since just 2011. (Source: "How Technology Is Destroying Jobs," MIT Technology Review, June 19, 2013.)
Outsourcing forces American workers to accept lower wages, or watch those jobs go to foreign workers. This lead to a lower U.S. standard of living as wages equalize. In addition, the U.S. labor force has become less competitive, adding to pressures to accept lower wages. See U.S. Is Losing its Competitive Edge.
China, India and many other emerging market countries are able to produce things more cheaply by paying lower wages. That's because China has a lower standard of living, meaning things cost less, so companies can pay less. See Purchasing Power Parity.
As a result, U.S. companies can only offer low wages to U.S. employees if they are to compete against these companies. If U.S. companies can't find enough low wage, skilled workers in the United States, they have to source these jobs overseas or go out of business.