LC M: 48/29 “DB 802.01 ..-:" \_ =y;~;%_: ,; E!!!LlI_.IL' :' " \_I_1:!|‘ .....___‘ ,___._,..... CONGRESSIONAL RESEARCH A E Universit ofMissouri-Col senvuce S H||N|| WI «mag lflylllllfilflhfii UBRARYOF S 010- 0 93 7 lllll 1 I W! s I R CONGRESS PRODUCTIVITY In THE URITED STATES: 'A BRIEF Bcoflofllg ovHRvIEw ’ HIHI#BRIE?"HfiMBEB‘HB8020¥f AUTHOR: Fisk, John D. Economics Division THE LIBRARY OF coHcREssI coneREssIoRAL RESEARCH SERVICE HAJOR ISSUES SYSTEM DATE ORIGINATED Qlgglggg ’ DATE UPDATED Q3 1QA§Q; FOR ADDITIONAL INFORMATION CALL 287-5700 0310 productivity. cRs— 1 use 0201 UPDATE-03/10/80 £§§E§-2§£lElElQ! The decline in the rate of growth of American labor productivity has aroused widespread concern. In 1978, the Council of Economic Advisers called the labor productivity slowdown "one of the most significant economic problems of ‘recent years." Some analysts have identified low labor productivity growth as an important cause for our current inflationary spiral, decline in international competitiveness, and slow growth in real income. The causes and remedies for the labor productivity slowdown are a subject of considerable controversy. . EAQEEEQQEQ. No single economic indicator can completely describe how the American economy performs. Numerous indicators exist, each one having its own particular use. Gross national product is a measure of the economy's final output of goods and services. Total factor productivity is an indicator of the efficiency with whichd inputs are used to produce output. Labor productivity, defined as output per unit of labor input, measures the efficiency of labor given the resources that labor works with in the production process. Since the resources that labor works with may change, factors other than just quality and motivation of the workforce affect labor productivity. The size of the capital stock, inputs of natural resources and .ergy, the mix of goods and services produced, and the state of technological progress also influence the level and growth rate ofw labor I In the) United States, labor productivity growth (as defined above) accounts for the majority of postwar real economic growth. Since World War’ II, output in the. private business sector of the economy Ahas grown) approximately 3.5% per year. Labor productivity advances account for 2.6 percentage points of this increase. Increased labor input accounted for) the remaining real economic growth of 0.9 percentage points. (These calculations are based on U.S. Bureau of Labor Statistics indexes of output per hour for the period between the 3rd quarter of 19u8 to the 4th quarter of 1978. Since only similar points in the business cycle are being compared, the calculations exclude 1979 which was a year of uneven growth. In 1979, output grew slowly at 2.ux, labor input grew. rapidly at 3.3%, while labor productivity fell 0.9%.) , : The close connection between labor productivity and real economic growth his typical of long-run trends. In the short run, this connection breaks“ down, particularly near the peak and trough of the business cycle. In the early stages of a business expansion, labor productivity ntypically grows rapidly as output increases and labor input grows slowly, if at all. (Employers put underutilized labor to work, increasing output without greatly expanding labor input.) As the expansion nears its peak, labor productivity cften grows less rapidly or declines. (Obsolete machinery may be put into Lye; marginal workers may be hired; and material shortages may develop.) In. this situation, growth in output may be associated with declining labor vproductivity instead of the reverse. when the business contraction begins, labor productivity and output both typically decline since firms hesitate to (lay-off workers while hoping for a rapid recovery. As the trough of the business cycle is approached, labor productivity growth may (resume as new cRs- 2 use o2o1 upnmz-o3/1o/so highly productive equipment is installed while employment still declines. Acain, labor productivity and output may be moving in opposite directions in t ; short run. Labor Productivity and Inflation Labor productivity, among other factors, is an important determinant of inflation. Labor productivity affects labor costs per unit of output. These costs largely determine total production costs, which in turn affect the final sale price of a product. Through this mechanism, labor productivity influences the price level. Although the connection between labor productivity and inflation certainly exists, several points are worthy iof note. First, growth in employee compensation is as important as labor productivity growth in determining the price level. when employee compensation grows more rapidly than labor productivity, the resulting rise in production costs puts upward pressure on the price level. Second, a few analysts view inflation as both a cause and a consequence of the labor productivity slowdown. (By increasing uncertainty and discouraging investment, inflation might reduce labor productivity growth.) Finally, because of the magnitude of our current inflation rate, (a resumption in rapid labor productivity growth at rates similar to those in the early post—World War II period would most likely not fully solve the problem of inflation, unles inflationary expectations were substantially altered. - By affecting prices, labor productivity has an important influence on the competitiveness of American products abroad. As a result, low American labor productivity growth rates are sometimes blamed for the decline in U.S. international competitiveness. (Although American labor productivity growth rates are below those of most other industrialized nations, the level of U.S. labor productivity remains above the levels of other developed nations.) Low labor productivity growth may certainly contribute to 90.5. trade problems,- but other factors such as exchange rates, wage rates, and speed of product delivery also deserve attention in analyzing American competitiveness abroad. Trends Because labor productivity influences ,economic growth, inflation, and international competitiveness, the slowdown in 0.5. labor productivity growth is a subject of considerable concern. In the middle to late 1960s, the trend rate of American labor productivity growth began to slow. From 1948 to 1966, labor productivity in the private business sector grew 3.2% per year. This rate declined to 2.0% per year in the 1966 to 1973 period. From 1973 to 1978, labor productivity grew only 1.2% per year. Thesew most recent. labor productivity growth rates are low in comparison_to both the pre-World War II period, and the 1948~66 postwar years. (These calculations are based on u.s. Bureau of Labor statistics indexes of output per hour.v The periods examined are the 3rd quarter 1948 to nth quarter 1966, 4th quarter 1966 to 3rd quarter ’ 73, and 3rd quarter 1973 to 4th quarter 1978. The calculations compare only similar points in the business cycle and consequently exclude 1979 which was a year of uneven growth. In 1979, labor productivity fell 0.9%.) Host observers of labor productivity trends agree that two major causes qexplain a portion of the 1966-73 labor productivity slowdown.w First, they note that large numbers of women and youth with less job experience and CRS- 3 HB80201 UPDATE—03/10/80 training have entered the labor force. Second, they attribute a notable fraction of the slowdown to the completion of the labor shift out of tgriculture and into other, more productive sectors of the economy. These two factors explain only part of the 1966-73 decline in labor productivity growth. _Ho consensus exists on the importance of other causes during this period. A slow rate of capital formation, a reduction in research and development expenditures, a decline in worker motivation, and an increase in Government regulation are all suggested additional explanations for the 1966-73 labor productivity slowdown. The further decline in labor producitivity growth since 1973 has generated considerable controversy. A multitude of causes for the decline has been suggested, but investigators of labor productivity trends have reached no general agreement about these causes. The following are frequently proposed causes for the labor productivity slowdown since 1973: (1) recent energy price increases, (2) slow rates of capital formation, (3) deteriorating worker motivation, (A) expanded Government regulation, and (5) reduced research and development expenditures.i The shift of labor into the service sector of the economy is another frequently mentioned cause of the labor productivity decline for both the 1966-73 and post-1973 periods. Nevertheless, most economists have concluded that the shift to services plays little or no role in explaining the labor productivity slowdown. : The far reaching consequences of the productivity problem have prompted some economists and public officials to recommend Government policies to halt the decline in labor productivity growth. These recommendations assume that "ivate profit incentives, which have served to increase labor productivity in the past, are no longer sufficient, or have been stifled by Government intervention in the economy. A wide range of policies to stimulate capital formation, research and development, and education and training has been suggested. Host of these recommendations are controversial, wand there is much disagreement over how effective and equitable the suggested policies would be. ‘ ' .l..12..12l.2l'..3§.9!l§.L-§.E§'§.1i§!§..E_.5..QQ§§§§ Clark, Peter. Capital Formation and the Recent Productivity Slowdown. The Journal of Finance, v. 33, no. 3, June 1978. pp. 965-975. Papers and Proceedings, 36th Annual Meeting, American Finance Association. New York City, December 28-30, 1977. 1 Cunningham, Bill. Productivity's Link to Economic Growth. The EFL-CIO American Pederationist, v. 85, no. 3, narch 1978. pp. 1-5. Denison, Edward F. Accounting for Slower Economic Growth: The United states in the 1970's. Washington, The Brookings Institution, 1979. 212 p. Denison, Edward F. Effects of Selected Changes in the Institutional and Human Environment Upon Output Per Unit of Input. Survey of Current Business v. 58, no. 1, January 1978. pp. 21-43. ° Denison, Edward F. 4Explanations of Declining Productivity Growth. Survey of Current Business, v. 59, CRS- 4 HB80201 UPDATR—O3/10/80 no. 8, Part 2, August 1979. pp. 1-24. Economic Report of the President, 1978. U.S. Govt. Print. 0ff., Kendrick, John W.‘ Productivity Trends and the Recent Slowdown: Historical Perspective, Casual Factors, and Policy Options. Contemporary Economic Problems 1979. Washington, American Enterprise Institute for Public Policy Research, 1979. pp. 17-69. National Association of Hanufacturers. Understanding Productivity "Toward a Higher Standard of Living." Perspective on National Issues. Washington, September 1979. 6 p. National Center for Productivity and Quality of Working Life. Productivity in the Changing world of the 1980's. Washington, U.S. Govt. Print. Off., 1978. 92 p. Norsworthy, J.R., Eichael J. Harper, and Kent Kunze. The Slowdown in Productivity Growth: Analysis of some Contributing Factors. Brookings Papers on Economic Activity, v. 2, 1979. pp. 387-421. Taton, John A. The Productivity Problem. Federal Reserve Bank of St. Louis Review, v. 61, no. 9, September 1979. pp. 3-16. Thurow, Lester. The U.S. Productivity Problem. The Data Resources Review of the U.S. Economy, v. 7, no. 8, August 1979. pp. 11u.119. U.S. Congress. House. Committee on Small Business. Subcommittee on General Oversight and ninority Enterprise. Productivity and the U.S. Economy. Hearings, 96th Congress, 1st session. March 14, 1979. Washington, 0.3. Govt. Print. Off., 1979. 113 p. U.S. Congress. Joint Economic Committee. Special Study on Economic Change. Hearings, 95th Congress, 2d session. Part 2. June 8, 9, 13, and 1a, 1978. Washington, U.S. Govt. Print. Off., 1978. 758 p. U.5. Library of Congress. Congressional Research Service. 0.5. Labor Productivity: Trends and Economic Impact. By John Fisk. December 6, 1979. ifiashington, 1979. #2 p. CRS Report No. 79-248 E LIBRARY OF WASHINGTON UNIVERSITY M Lquzjs — Mo. ‘