Productivity Growth and Job Growth

Here is an interesting piece of research on jobs and productivity growth from the Federal Reserve Bank of San Francisco.

Have the extraordinary gains in productivity in recent years been temporary or more permanent? SF Federal Reserve Bank researchers Mary Daly and Fred Furlong argue that the gains have been lasting and are unlikely to be unwound as the economy adds jobs.

The performance of productivity in the U.S. economy has delivered some big surprises over the last several years. One surprise was in the latter half of the 1990s, when productivity growth surged to average an annual rate of over 3%, more than twice as fast as the rate in the previous two decades. A bigger surprise has been the further ratcheting up of productivity growth since the most recent recession. Even with a slowing to below a 1-3/4% annual pace in the second half of last year, productivity growth averaged around 3.8% for the 2001 through 2004 period. That is an extraordinarily high number by historical standards. It also is well above the consensus view among economists, which is that trend growth of productivity is on the order of 2-1/2%.

The state-level data tell us that the U.S. productivity surge and coincident sluggish job growth in the recent recovery were not necessarily parts of the same phenomenon. The enormous gains in efficiency in the U.S. were pervasive among the states and not correlated with job growth. This is consistent with the view that the gains in the level of productivity we have observed are lasting and unlikely to be unwound substantially once employment growth picks up.

That does not mean that the growth rate of productivity will move back up to the elevated average pace seen in recent years. Even if the gains in the level of productivity realized over the past several years are retained, progress toward still higher levels of efficiency could come more slowly. Indeed, sustaining productivity growth at an average pace of close to 4% per year would be remarkable by historical standards. For example, if some of the very rapid pace of productivity growth during the recent recovery were the result of lagged effects from past investments in technology and changes in workplace practices, a diminution of those effects could mean slower productivity growth going forward. That said, evidence from the state data raises doubts that take-backs from earlier productivity gains will constitute a significant factor pushing productivity growth below its long-run trend.