Nation/World

Why is productivity so weak? Three theories

More than 151 million Americans count themselves employed, a number that has risen sharply in the last few years. The question is this: What are they doing all day?

Because whatever it is, it barely seems to be registering in economic output. The number of hours Americans worked rose 1.9 percent in the year that ended in March. New data released Thursday showed that gross domestic product in the first quarter was up 1.9 percent over the previous year. Despite constant advances in software, equipment and management practices to try to make corporate America more efficient, actual economic output is merely moving in lock step with the number of hours people put in, rather than rising as it has throughout modern history.

We could chalk that up to a statistical blip if it were a single year; productivity data are notoriously volatile. But this has been going on for some time. From 2011 through 2015, the government's official labor productivity measure shows only 0.4 percent annual growth in output per hour of work. That's the lowest for a five-year span since the 1977-to-1982 period, and far below the 2.3 percent average since the 1950s.

Productivity is one of the most important yet least understood areas of economics. Over long periods, it is the only pathway toward higher levels of prosperity; the reason an American worker makes much more today than a century ago is that each hour of labor produces much more in goods and services. Put bluntly, if the kind of productivity growth implied by the new data published Thursday were to persist indefinitely, your grandchildren would be no richer than you.

But it is also really hard to measure, particularly for service firms. (How productive were employees at Facebook, or your local bank, last quarter? Have fun trying to figure it out.)

And even with years of hindsight, economists are never quite sure why productivity rises or falls. During the 2008 recession, labor productivity soared. Was this because employers laid off their least productive workers first? Because everybody worked harder, fearful for their jobs? Or was it a measurement problem as government statistics-takers struggled to capture fast-moving changes in the economy? We don't know for sure.

That is a long way of saying we don't know for sure what is going on right now, or how long it will last. But the possible answers range from utterly depressing to downright optimistic.

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The Depressing Scenario

The productivity slowdown is real, and it's not going away. Earlier waves of innovation in technology (a computer on every office worker's desk, for example) and management strategies (like outsourcing noncore functions) have been fully put into place across corporate America, and so are no longer increasing productivity.

Add to that a slowdown in capital spending by businesses since the 2008 recession, which means workers aren't getting better equipment or software that might help them do their jobs more efficiently. Moreover, if you believe the theory mentioned above about low-productivity workers being more likely to lose their jobs during the recession, the people returning to the labor force now may be less effective at boosting economic output for each hour they put in.

In the depressing scenario, Americans' standards of living are just going to grow more slowly in the future, and there's not much we can do about it. Fortunately, this isn't the only possible one.

The Neutral Scenario

Maybe we just aren't counting things right — or, to use the economists' preferred term, there is measurement error.

After all, entire industries are being transformed in ways hard to account for in data on gross domestic product, particularly in technology and services. Having a high-powered computer in our pockets and social networks that let us stay in touch with friends may make us better off than the narrow math of gross domestic product — which counts only what we pay for — would suggest.

Still, it's not clear why these nonmarket gains in quality of life would be so different now than they were in earlier generations when, for example, videocassette recorders became widespread or the air became cleaner thanks to environmental regulation.

"The issue is not whether there's bias," economists David M. Byrne, John G. Fernald and Marshall B. Reinsdorf wrote in a paper on measurement issues in productivity at the Brookings Papers on Economic Activity this spring. "The question is whether it's larger than it used to be."

Their conclusion, after examining tech and other measurement issues, is that it isn't. That said, the tools that statistics-keepers use to measure the economy are never perfect, so there could be problems not yet understood that are creating a false impression of a productivity drought.

The Happy Scenario

Think about a business that is investing for the future. It hires a bunch of people and opens new offices and builds new factories. But while it is doing all that stuff, its actual productivity is quite low. It has a lot of people working a lot of hours, but very low economic output until its operations are fully up to speed.

Maybe, just maybe, that is happening with the U.S. economy writ large. Businesses are adding workers in preparation for the future, but it will take time for their investments to pay off in terms of gross domestic product.

There's a recent precedent for that pattern. In the late 1990s, the stock market was booming and companies were making huge investments in staff, equipment and information technology. But reported productivity growth was actually below the long-term trend — only about 1.7 percent a year from 1993 to 1998, for example. Then it began soaring in the years that followed, particularly in the early 2000s.

But here's one piece of evidence that the pattern of the 1990s is not what is afoot today: Business investment spending on equipment, intellectual property and structures is low relative to the size of the economy. You'd expect those numbers to be higher if this was just a productivity lull as the economy waits for big investments in the future to pay off.

Still, there could be enough going on below the surface of those overall numbers that the optimistic case remains plausible. To use one example, engineers at several companies are hard at work trying to perfect driverless cars. At present, they are a sap on productivity — they put in many thousands of hours of work with no economic output to show for it. But if successful, their work could radically increase the nation's productivity in the decades ahead.

Apply the same across a wide range of fields — industrial goods, pharmaceuticals and medicine, financial technology firms — and optimism becomes more plausible. That's the scenario we should all hope is occurring: Slow productivity growth now is just a down payment on a much brighter future.

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