America’s Productivity Growth: Soaring or Falling?

Productivity

Taylor Abernathy-Period 3-Honorbound

The one question that all Americans should be asking themselves is “if we are more productive than we were several years ago then why has there not been high productivity growth rates recently?” In order to properly answer this question it is important to understand two main concepts of economics, human capital and productivity. Charles Wheelan describes human capital as “the sum total of skills embodied within an individual” whether it be education, work experience, judgement, etc. [1]. Human capital is directly linked to productivity. The more human capital a person has the more productive they will be if they use their skills. Productivity is “the efficiency with which we convert inputs into outputs” [2]. But what affects productivity and how can we increase productivity growth? Investments in technology, specialization, and skills also known as human capital are all factors that contribute to productivity [3].

Today, Americans have become more productive because they are working less and producing more goods but economist Robert Gordon explains that “productivity growth soared between 1920 and 1970 but has sputtered since then” and he even predicts that America’s productivity growth rates will actually get worse in the next few decades [4]. Productivity growth is what improves people’s standard of living and makes us richer. From 1947 to 1975 productivity grew at a rate of 2.7% a year, from 1975 to the mid-1990s productivity growth slowed down to 1.4% a year, and from 2000 to 2008 productivity growth went up to 2.5% a year [5]. Although productivity went up to 2.5% it did not quite reach back to the high of 2.7% a year again. Remember that before the 1920s cars, indoor plumbing and electricity were not being used which is why productivity rose tremendously high when these innovations were created.

Robert Gordon responds to America’s productivity growth per year not being as high as it was from 1920 to 1970 because of “six headwinds” including demography, education, globalization, climate change, overhang of consumer and government debt that inhibits productivity growth [6]. Another reason for productivity growth rates going down is because  “Since the 1950’s, manufacturing has fallen from about 35% of the labor force in the US to about 20%, while at the same time services has soared from just over half of the labor force to nearly 80%” [7]. The Baumol effect takes this a step further by explaining that many American’s incomes go toward paying health insurance and student loans instead of making investments [8]. Because productivity is a long term focus, it is also a possibility that the investments that businesses are making just need time to make us better off in the future.  Another thought process suggests that not all businesses are being impacted by the most recent technological advancements because they simply are not using them [9].

Without a doubt, the most central economic issue in America is productivity which is highly dependent on making investments now in place of only consuming. Even though we are more productive than we were in the past, we have not been seeing productivity rates rise to all-time highs which can be attributed to needing more time for investments to make us better off in the future or to more investments needing to be made.

  1. Wheelan, Charles J., and Burton G. Malkiel. Naked Economics: undressing the dismal science. New York: W.W. Norton & Company, 2012.
  2. Ibid
  3. Ibid
  4. Satell, Greg, “Wake up America! This is the Real Problem with the US Economy,”Forbes, October 29, 2016. Accessed March 26, 2016. https://www.forbes.com/sites/gregsatell/2016/10/29/wake-up-america-this-is-the-real-problem-with-the-us-economy/#5b12c6c72ef3.
  5. Wheelan, Charles J., and Burton G. Malkiel. Naked Economics: undressing the dismal science. New York: W.W. Norton & Company, 2012.
  6. Satell, Greg, “Wake up America! This is the Real Problem with the US Economy,”Forbes, October 29, 2016. Accessed March 26, 2016. https://www.forbes.com/sites/gregsatell/2016/10/29/wake-up-america-this-is-the-real-problem-with-the-us-economy/#5b12c6c72ef3.
  7. Ibid
  8. Irwin, Neil, “Why is Productivity so Weak? Three Theories,” The New York Times, April 28, 2016. Accessed March 26, 2016. https://www.nytimes.com/2016/04/29/upshot/why-is-productivity-so-weak-three-theories.html?_r=1.
  9. Chandler, Adam, “Why are American Workers Getting Less Productive,” The Atlantic, August 12, 2016. Accessed March 26, 2016. https://www.theatlantic.com/business/archive/2016/08/us-workers-productivity/495722/.
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