Productivity and potential output growth in the United States

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Article Highlights

  • Output per hour doubles every 31 years.

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  • Productivity growth strengthened from 1995 to 2004, rising about 3 percent a year.

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  • While the dislocations produced by the financial crisis likely have dampened the gains in productivity, they are not the root cause of the slowdown.

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Discussions about the state of the economy tend to focus much more on the monthly wiggles in the data, the Fed's latest program to stimulate spending, and the drama on Capitol Hill than on the potential for the economy to generate higher income over the long haul. Yet, the growth in potential output is really what matters for the economic health of the nation. Moreover, as emphasized in Krugman's famous quote, growth in productivity is the engine that drives the rise in living standards. Between 1889 and 2012 ― the longest span of time with reasonably consistent data ― real output per hour worked in the United States rose about 2¼ percent per year on average. At this annual rate, output per hour doubles every 31 years, which implies roughly a 15- fold increase since 1889.


Viewed against this long historical record, the recent performance of productivity has been lackluster. Figure 1 plots the data for output per hour worked in the nonfarm business sector over the past forty years, broken into three periods: 1974-95, 1995-2004, and 2004-12. During the first period, output per hour grew at an average annual rate of about 1½ percent, well below the long-term average pace of 2¼ percent. Productivity growth strengthened from 1995 to 2004, rising about 3 percent per year. But since 2004, the trend increase in output per hour has returned to the slow pace recorded from 1974 to 1995. Notably, this slowdown pre-dated the onset of the financial crisis. Thus, while the dislocations produced by the crisis likely have damped the gains in productivity, they are not the root cause of the slowdown.



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