Numbers confirm policy changes needed to boost productivity

Raymond Keating
Raymond Keating

The latest numbers reported by the U.S. Bureau of Labor Statistics continued an incredibly long stretch of poor labor productivity. Let’s consider four key points on the productivity front.

In the first quarter of this year, nonfarm labor productivity declined by 1 percent. That came on the heels of a 1.7 percent decline in the fourth quarter of last year.
Labor productivity as defined by the BLS, by the way, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors and unpaid family workers.

Productivity growth has been poor for more than five years now. From 2011 to 2015, productivity growth failed to reach 1 percent in any year — 0.2 percent in 2011, 0.9 percent in 2012, 0 percent in 2013, 0.8 percent in 2014 and 0.7 percent in 2015. That is the worst performance looking back at the data we have from 1948 forward. The only period to rival this was from 1979 to 1982, when productivity declined in three of four years.

The source of the problem is woeful investment. There’s no real mystery as to our productivity woes. Labor productivity is tied to investment made in technology, tools, machinery, business facilities, skills, education and so on. According to the latest data for gross domestic product, the broad measure of goods and services produced in the country, real private fixed investment has barely grown from the pre-recession high, increasing by a tiny 1.9 percent from the first quarter of 2006 to the first quarter of 2016. If we focus just on nonresidential fixed investment, which excludes residential housing, real business investment gained a woeful 9.1 percent from the first quarter of 2008 to the first quarter of 2016. For good measure, one has to factor into the equation the level of resources being wasted in the areas of primary, secondary and higher education.

This lack of productivity growth is a real and significant problem when it comes to wages and incomes. After all, income and wage levels and growth are fundamentally tied to productivity. Greater productivity translates into higher earnings.

The lack of productivity growth in recent years means we should be talking about reducing tax and regulatory burdens and obstacles on investment and entrepreneurship at the federal, state and local levels. It also means we need a very different agenda on education, namely, shifting away from public school monopolies to innovative choices and flexibility in our educational system.

The notion that more taxes, regulations and government control won’t have significant negatives is to deny the realities taught by economics, business and history.

In the end, we need more entrepreneurship, investment and innovation throughout the economy, and that can’t happen under the heavy hand of government.