Last week, preliminary productivity growth estimates for the second quarter of this year were released. The numbers were better than many private economists had projected, with 2.9% growth in productivity in the nonfarm business sector. Although well off the pace of earlier in the year, itís still a notable gain. In manufacturing, productivity was up some 7.5%, impressive growth for such a mature economy. Hereís a little perspective.
Productivity gains are estimated by the US Department of Laborís Bureau of Labor Statistics. Essentially, they look at output (gross product) per hour of all persons and see how that varies from previous periods of time. For countries with big problems, productivity can fluctuate wildly. An economy dominated by agriculture, for example, may see productivity swings driven by drought cycles or other weather conditions. In nations with very little in the way of infrastructure, the addition of basic services (such as additional telephone or electric generation capacity) can lead to notable jumps. In the US, however, itís more difficult to continue to post productivity gains when the business climate is already so favorable.
America has the most productive workforce anywhere. Actually, the official number one country on a rank order list of gross domestic product per capita maintained by the CIA in that agencyís World Factbook is Luxembourg. However, with less than half a million people living there (compared to some 293,000,000 here), it is hardly an economic powerhouse. The US is second, with about $37,800 in output produced per person (man, woman, and child). Rounding out the top ten are Norway, Bermuda, Cayman Islands, San Marino, Switzerland, Denmark, Iceland, and Austria. The US population dwarfs all of these, and several are very small countries. The point is this: in the case of a small population, itís possible to have high output per capita figures if there is anything in the way of natural resources, favorable tax codes, or even a handful of flourishing industries. The fact that the US productivity per capita is so high, even with our nearly 300 million people, is all the more impressive.
One reason for productivity gains in the US is the more rapid assimilation of new technologies. Thanks in part to fortuitous timing, much of the US capital stock entered a replacement phase around the time microelectronics were exploding onto the scene. New products and methods are rapidly put into use in firms across the US, enhancing efficiency and the effectiveness of labor. Clearly, such technological advances are a key reason we can produce so much output per worker. However, these breakthroughs are available to any business around the world, so they donít explain the differential between America and other nations.
Another explanation for higher US productivity centers on the fact that, compared to other countries, a higher proportion of Americans are working. The Organisation for Economic Co-operation and Development (OECD) tracked the proportion of people of working age who were employed last year; a higher percentage of Americans are working than in any European country or Japan. This reflects a relatively low unemployment rate, later retirement, and greater participation by women. Another factor is demographics. As the baby boomers age, the US has the most experienced and educated labor force in the history of the world.
In addition, those who do work in the US put in more hours. While the average number of hours worked per person in a typical year has gone up some 20% in the US since 1970, in other countries it is dropping. In France, hours worked has fallen by well over 20%, a trend reflected in other European countries as well. Only Australia, Iceland, Canada, New Zealand, and the US have seen growth in the number of hours worked. This is something of a two-edged sword in that it reflects an abundance of opportunities, but can lead to time crunches for families.
In Europe, six weeks of vacation is typical and workweeks are being shortened. Stifling tax rates decrease the incentive to work for many Europeans, and large welfare systems cushion the blow of being unemployed. Cultural differences and expectations regarding leisure time and vacations explain a portion of the differential, but a lack of opportunity accounts for a large share. With business activity stagnating and populations aging, it will be virtually impossible for European nations to keep pace with the US in terms of economic growth.
Productivity growth is a good thing. It signals a healthy business environment and a wealth of opportunity. It also allows increasing wages and standards of living without any inflationary pressure. While recent trends may not be sustainable forever, they are establishing a critical base from which to maintain economic prosperity.