Labor Productivity and Economic Growth

The “New Economy” Controversy

In recent years a controversy has been brewing among economists about the resurgence of U.S. productivity in the second half of the 1990s. One school of thought argues that the United States had developed a “new economy” based on the extraordinary advances in communications and information technology of the 1990s. The most optimistic proponents argue that it would generate higher average productivity growth for decades to come. The pessimists, alternatively, argue that even five or ten years of stronger productivity growth does not prove that higher productivity will last for the long term. It is hard to infer anything about long-term productivity trends during the later part of the 2000s, because the steep 2008-2009 recession, with its sharp but not completely synchronized declines in output and employment, complicates any interpretation. While productivity growth was high in 2009 and 2010 (around 3%), it has slowed down since then.

Productivity growth is also closely linked to the average level of wages. Over time, the amount that firms are willing to pay workers will depend on the value of the output those workers produce. If a few employers tried to pay their workers less than what those workers produced, then those workers would receive offers of higher wages from other profit-seeking employers. If a few employers mistakenly paid their workers more than what those workers produced, those employers would soon end up with losses. In the long run, productivity per hour is the most important determinant of the average wage level in any economy. To learn how to compare economies in this regard, follow the steps in the following Work It Out feature.

Comparing the Economies of Two Countries

The Organization for Economic Co-operation and Development (OECD) tracks data on the annual growth rate of real GDP per hour worked. You can find these data on the OECD data webpage “Growth in GDP per capita, productivity and ULC” at this website.

Step 1. Visit the OECD website given above and select two countries to compare.

Step 2. On the drop-down menu “Subject,” select “ GDP per capita, constant prices,” and under “Measure,” select “Annual growth/change.” Then record the data for the countries you have chosen for the five most recent years.

Step 3. Go back to the drop-down “Subject” menu and select “GDP per hour worked, constant prices,” and under “Measure” again select “Annual growth/change.” Select data for the same years for which you selected GDP per capita data.

Step 4. Compare real GDP growth for both countries. Table provides an example of a comparison between Belgium and Canada.

Australia 2011 2012 2013 2014 2015
Real GDP/Capita Growth (%) 2.3% 1.5% 1.3% 1.4 0.1%
Real GDP Growth/Hours Worked (%) 1.7% −0.1% 1.4% 2.2% −0.2%
Belgium 2011 2012 2013 2014 2015
Real GDP/Capita Growth (%) 0.9 −0.6 −0.5 1.2 1.0
Real GDP Growth/Hours Worked (%) −0.5 −0.3 0.4 1.4 0.9

Step 5. For both measures, growth in Canada is greater than growth in Belgium for the first four years. In addition, there are year-to-year fluctuations. Many factors can affect growth. For example, one factor that may have contributed to Canada’s stronger growth may be its larger inflows of immigrants, who generally contribute to economic growth.