Based upon the article, "The Productivity Puzzle,"

PAGE ONE Economics PAGE ONE Economics Federal Reserve Bank of St. Louis | research.stlouisfed.org 2 PAGE ONE Economics Federal Reserve Bank of St. Louis | research.stlouisfed.org 3 productivity enables an economy to produce the same Figure 2 Productivity Growth that productivity will improve more slowly. Economists able. Some suggest that we could be one innovation The Productivity Puzzle amount of output (or more) with fewer workers. In fact, disagree about how much this piece explains the larger away from a burst in productivity growth similar to the productivity is key to raising the standard of living. FRED puzzle, with estimates ranging from 25 to 70 percent of one from 1995 to 2004.12 Possible sources are the fields Basically, a country can consume (buy) more goods and the current slowdown in productivity. of robotics and artificial intelligence. 13 Or the case could services per person if they produce more goods and ser- be, as proposed by some, that the age of large vices per person. But how does this happen? Economists Second, economists suggest that changes in human innovations (e.g., electrification and computers) is Scott A. Walla Ph.D., Senior Economic Education Specialist say that changes in productivity are usually due to some capital in the workforce are contributing to the change in productivity. Research suggests that rising levels of behind us and that productivity growth (and living combination of these factors: human capital explain about 20 percent of U.S. standards) will likely increase little for the foreseeable future. 14 1. Increases in physical capital (both quantity and productivity growth from 1950 to 2007. Average GLOSSARY 'Human history teaches us that economic growth springs from better quality) per worker. Physical capital (also known as educational attainment, which is the highest level of Can the Government Boost Productivity? Investment: Thepurchaseofphysical capital recipes, not just from more cooking." capital resources and capital goods) are goods that education that an individual has completed, has been goods (e.g., buildings, tools and equipment) have been produced and are used to produce other growing at about one year per decade and has Economists concerned about the decrease in productivity -Paul Romer that are used to produce goods and services. goods and services. They are used over and over again 2005 contributed about 0.6 per- centage points to suggest that government policy can play a role. Standard of living: A measure of the goods in the production process. For example, imagine an productivity growth per year. Most recently, Government spending on infrastructure (e.g., airports, and services availabletoeach personina country; a measure of economic well-being. Have you ever walked through a store and looked closely at where the accountant keeping track of a corporation's finances highways, and bridges) could increase productivity NOTE: From 1995 to 2010 productivity growth averaged 2.5 percent (top red educational attainment has slowed, which will (other products are made? If so, you might find yourself wondering if anything is line), since that time (2011-2015) it has been 0.4 percent (bottom red line). things equal) likely contribute to slower productivity because it reduces the cost (in time and money) of Also known as per capita real GDP (gross with an old-fashioned ac w, imagine domestic product). transporting goods and people from one place to manufactured in the United States anymore. As it turns out, manufacturing the same accountant equipped with a computer and SOURCE: Author's calculation and U.S. Bureau of Labor Statistics, retrieved growth in the future. output in the United States is near its highest levels ever. In fact, the United sophisticated software. In each case, one accountant from FRED, Federal Reserve Bank of St. Louis; https:/fred.stlouisfed.org/ another.15 Government could also increase productivity graph/?REC4cP, accessed January 20, 2017. Finally, some of the slowdown in productivity growth is States produces twice as much as it did in 1982, with one-third fewer is doing the work, but the output (and therefore by increasing education spending, 16 which increases the likely due to a slowdown in technological change. Some productivity) will likely be higher with the computer human capital of the workforce. In addition, tax reform workers (Figure 1).1 economists speculate that even with advances in and software. the labor force is now working in the agriculture that creates incentives for capital investment by private sector of the economy.3 technology, some of the newer advances might impact irms and more effective regulations could also Figure 1 2. Increases in human capital per worker. Human productivity only slightly. For example, Twitter and Manufacturing Output and Employment increase productivity.17 Spending on R&D (research capital is the knowledge and skills that people obtain Changing Productivity Over Time Snapchat have great social value (and the companies and development) could promote technological FRED through education, experience, and training. Consider Because productivity determines output, productivity is themselves have a high market value), but they likely have change, but more R&D does not always result in new the accountant with her computer and software, major influence on a country's rate of economic growth little impact on labor productivity. In fact, some technologies. And, because government intervention but imagine she gets new software. Chances are and standard of living. As such, it is very important eco- speculate that they might even reduce labor has costs, paying for these policies will result in higher she would benefit from training on the software, nomic data. From 1995 to 2010, U.S. productivity growth productivity because they dis- tract workers from their taxes, larger budget deficits, or the loss of services and her skills will grow further with experience. In a jobs." A reality of technological change is that there is averaged 2.5 percent (Figure 2). Recently, however, currently enjoyed. The key piece of the productivity similar way, the education that students receive in very often a long lag before it impacts productivity. For puzzle-technological change-is the most difficult to 12 860 productivity has declined- it averaged only 0.4 percent school and college (and further training and work example, consider the series of inventions between from 2011 to 2015.4 Lower productivity growth achieve because it is unpredictable. experience) is an important part of the productivity 1860 and 1900, which included the electric light, constrains a country's economic growth and results in a growth story. electric motor, and internal combustion engine; Conclusion slower increase in the standard of living. telegraph and telephone; and indoor plumbing and 3. Technological change. Technological change (also J.S. productivity experienced rapid growth from 1995 Economists have suggested several theories for the sanitation. This burst of technological change has been to 2010, but it has slowed recently. Because productivity NOTE: The red line shows manufacturing output; the blue line shows employ- known as technological advancement) is an advance productivity slowdown, and most of the analysis called the Second Industrial Revolution. These inventions growth directly affects living standards and workers' donot in manufacturing. Starting in the 1980s, manufacturing employment in overall knowledge in a specific area. For example, had an immediate effect, but they continued to le output continued to rise. centers on changes in the three factors discussed it could be the introduction of new production wages, economists have discussed many potential rea- SOURCE: U.S. Bureau of Labor Statistics and Board of Governors of the Federal above. dramatically increase productivity for six decades- from 1913 to 1972-as people found new ways to apply sons for the slowdown. They have identified weak capital Reserve System, retrieved from FRED, Federal Reserve Bank of St. Louis; techniques or methods that allow firms to produce investment and a slowdown in educational attainment https://fred.stlouisfed.org/graph/?=cexg, accessed January 20, 2017. more output with the same amount of labor and First, economists point to weak investment in capital them. 10 it has been proposed that the invention of the physical capital. Technological change is the largest stock. The capital stock is the total available physical computer and internet might embody a Third Industrial as causes but also a slowdown in technological change. Historically, the largest contributor to productivity growth contributor to productivity.2 Think about farming. capital in a nation. A nation can increase its capital stock Revolution in that the impact of these technologies will Where Does Productivity Come From? has been technological change. Capital investment and One hundred years ago, a large portion of the through investment. The capital stock decreases due take years to play out as people find new ways to use Here's our riddle: How does an economy manufacture more goods with them. 11 educational attainment are easier to improve through American labor force worked on farms because food to capital depreciation, which is the amount of capital fewer workers? The answer lies in the economic concept of productivity. investment and spending on education; however, production was very labor intensive. But, due to worn out or used up in producing a nation's economic Productivity is the ratio of output per worker per unit of time. Increasing technological change is more difficult to fix because it large increases in productivity (because of new output. Currently, the capital stock has been growing at What's Next? is inherently unpredictable. . farming technology), more food is produced, while a slower rate. This means that the increase in capital per If productivity stays at its current pace, slow growth in March 2017 Federal Reserve Bank of St. Louis | research.stlouisfed.org less than 2 percent of worker has been smaller than in previous periods and the standard of living and wages for workers is likely. Innovations are, however, by their very nature unpredict