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November 7,1 980
Productivity Slowdown: I
Economists and policymakers have become
increasingly concerned in recent years about
the slowdown in U.S. productivity. Productivity has always exhibited a strong cyclical
movement in line with changes in business
conditions, but analysts today are less concerned with these quarter-to-quarter gyrations than with the secularnoncy<;:lical)
(
trend.
For the private economy, the annual rate of
increase in labor productivity (output per
hour) averaged 3.2 percent for the 1948-65
period, but slowed to 2.3 percent in the
1 965-73 period and then to only 1.2 percent
in the 1 973-78 period. The rate of increase in
total factor productivity (output per weighted
unit of capital and labor input) exhibited a
similar slowdown-from
an annual rate of
1.3 percent in the first period to 0.7 percent
and 0.4 percent in the last two periods, respectively. Since 1978, the figures have been
much worse, largely reflecting adverse cyclical factors in addition to this secular
weakness.
What factors underlie the secular deterioration in productivity growth? A decade ago,
many studies attributed the.deceleration in
productivity growth to shifts in employment
and output among sectors with different
levels of labor efficiency. In particular, the
early-postwar shift of workers out of the lowproductivity farm sector to higher productivity sectors initially boosted aggregate
productivity growth, but this positive effect
waned as the farm share of total employment
declined from 1 8 percent in 1 948 to 5 percent inthe 1970s.
' .
u.s.
The productivity slowdown would not be a
major pUblic-policy issue if this were all that
was involved, because basic structural
changes in the economy cannot be manipulated easily by government policy. Even if
they could be, generally itwould not be in the
public interest to do so, for such structural
changes tend to reflectthe public's basic preferences to spend their incomes and seek employment in ways that increase society's general welfare.
Importance of productivity
Concern over the secular trend of productivity stems from its role as the key determinant
ofthe nation's material standard of living. For
example, at a 3.2-percent annual growth rate
(the 1 948-65 average), real income per hour
would double in only 22 years, whereas at a
1 .2-percent rate (the 1 973-78 average), 58
years would be required. Moreover, the rate
of labor-productivity increase is the major
determinant of the difference between wage
and price inflation. With a 3.2-percent rate of
increase in labor productivity, annual wage
inflation of 1 0.0 percent would translate
roughly into price inflation of 6.8 percent.
With a 1 .2-percent productivity increase,
however, the same rate of wage inflation
would translate into price inflationof8.8 percent. Labor-productivity growth therefore is
clearly central to the pol itical issuesthat arise
when the gap narrows between wage and
price inflation.
Sectoralshifts
The importance of sectoral shifts can be tested by subdividing the economy into twelve
sectors, and then breaking down aggregate
labor productivity change into "rate" and
"level" effects. The rate effect is the part of
aggregate productivity change that is attributable to productivity change within sectors,
and the level effect is the part attributable to
shifts in labor (and output) between sectors
with different productivity levels. Thus, one
can determine the degree to which the aggregate productivity slowdown has resulted
from slowdowns within individual sectors, as
opposed to shifts of labor and output among
the twelve sectors.
The first point to note is that the level effect
(intersectoral shifts) accounted for very little
of the aggregate productivity slowdown over
the 1 948-78 period -specifically for only 0.3
15) IT\\ k:((J)II
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CC(§)CC
li <1»
Opinions
e)cpressed in this
do not
reflect the vievvs of the rnanagement
f<,:.'::;erve
Bank of San Francisco,
nor of the BCiard of Governors of the Federal
properly for qual ity change. Thus, the productivity data, which show a fairly steady
annual rate of increase of just under 2 percent, may not give an accurate reflection of
the true trends in the service sector, and in
particular, may fail to pick up significant
changes in trend.
percentage points of the total 2.0 percentagepoi nt deceleration between 1 948-65 and
1973-78. Also, while the level effect has contributed to the slowdown in aggregate productivity growth over the enti re post WWII
period, it nevertheless is still positive. This
reflects the fact that workers have tended to
shift from low-to-high productivity sectors
over this period, but at a diminishing rate.
Thus, the level effect accounted for 0.4 percentage points of the 3.2 percentage-point
rate of productivity advance in the 1 948-65
period, and for only 0.1 percentage point of
the 1.2 percentage-point rate of increase over
the 1 973-78 period.
The communications sector-primarily the
telephone industry-in contrast was the only
star productivity performer of the 1970s.
Labor-productivity growth accelerated in that
sector from 5 percent previously to 7 percent
annually over the 1 973-78 period. Total factor productivity also advanced sharply in
communications.
Large productivity boosts from sectoral shifts,
while typical of the nation's past economic
history, are much less evident here:today than
in developing nations. In some developing
countries, aggregate productivity change
may increase as much as 20 percent per year,
as massesof workers shift from low-productivity agricultural employment to high-productivity industrial jobs.
Weakenedproductivity
.... ;;""
Productivity performance elsewhere was
generally dismal in the 1970s, in terms of
both labor and total factor productivity. Indeed, labor productivity actually declined in
mining, construction, and wholesale trade
during the 1 973-78 period. Mining (oil, gas,
coal and metals) showed the most dramatic
deterioration,froma plLJs4.3-percent annual
rate in 1 948-65 to a minus 4.8-percent rate in
1 973-78. This dramatic decline reflected the
increasing cost of marginal production in
mining-particularly
in light of incentives to
increase marginal output under rising world
energy prices-and also reflected the adverse effects of safety and environmental legislation on the industry'S measured output.
(For the most part the benefits of such programs are not part of measured
output. Regardless of their positive effects, therefore,
they tend to reduce measured productivity
growth.)
Slowdown within sectors
Productivity slowdowns within most of the
twelve major sectors of the economy (the rate
effect) in contrast accounted for 1 .7 percentage points of the 2.0 percentage-point slowdown in aggregate labor productivity growth
between the 1948-65 and 1 973-78 periods.
Labor-productivity growth decelerated significantly in ten outofthetwelve sectors, and in
three of those ten, growth rates turned negative, meaning that their productivity actually
declined. The same general patterns were
evident in terms of total factor productivitythe productivity of capital and labor combined. Sectoral analysis thus points to the
conclusion that the productivity problem is
symptomatic of most sectors.
Declining levels of productivity in construction and wholesale trade remain a mystery to
productivity analysts. The problem in construction may reflect measurement problems-although measurement problems
have always plagued this sector, and therefore should not have caused the significant
change in trend which actually occurred in
that industry.
The communications and service sectors
were the only
to the declining
trend, and in the latter case the explanation
may simply be data inaccuracies. Within
much of this sector, it is difficult to value
outputs independently of inputs and to adjust
2
Seven other industry sectors experienced
positive productivity increases over the
1973-78 period, but at a much slower pace
than in the earlier postwar period. This trend
was so pervasive that it suggests macroeconomic rather than microeconomic factorsthat is, the underlying causes were probably
Annual Average
Change(%)
3.0
2.0
common to most of the sectors. A general
slowdown in capital investment may be the
most likely cause, and consequently we shall
examine that factor in detail in our next
Weekly Letter.
Jack8eebeand JaneHaltmaier
,. Secular Productivity.
Growth
Labor
productivity
).-
Total factor
productivity
to
1948-65
1 965-73
3
1973-78
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{1
BANKING DATA-TWELFTHFEDERAL
RESERVE TRla
DIS
(Dollar amounts millions)
in
Selected
Assets Liabilities
and
LargeCommercialBanks
loans (gross,
adjusted) investments*
and
loans (gross,
adjusted) total#
Commercial industrial
and
Realestate
loans to individuals
Securities
loans
U.s.Treasury
securities*
Othersecurities*
Demanddeposits total#
Demanddeposits adjusted
Savings
deposits total
Timedeposits total#
Individuals,
part.& corp.
(large negotiable
CD's)
WeeklyAverages
of Daily Figures
MemberBankReserve
Position
ExceSs
Reserves )/Deficiency )
(+
(Borrowings
Net freereserves+ )/Netborrowed( )
(
-
Amount
Outstanding
Change
from
10/22/80
10/15/80
141,607
119,591
35,000
48,757
23,674
1,185
6,654
15,362
44,041
33,048
29,785
64,951
56,265
24,416
269
212
149
202
33
55
77
20
-4,066
-1,909
15
418
365
194
Change
from
yearago
Dollar
Percent
-
-
-
Weekended
Weekended
10/22/80
10/15/80
66
146
211
139
94
45
6,684
7,928
3,189
6,918
78
546
957
287
871
1,869
162
8,980
8,648
3,494
5.0
7.1
10.0
16.5
0.3
- 31.5
- 12.6
1.8
2.0
6.0
0.5
16.0
18.2
16.7
Comparable
year-ago
period
-
1
179
181
* Excludes
tradingaccountsecurities.
# Includesitemsnotshownseparately.
Editorialcomments
maybeaddressed the editor (William Burke)or to the author.... Free
to
copies this
of
andother Federal
Reserve
publications beobtained callingor writing thePublicInfonnation
can
by
Section,
Federal
Reserve
Bankof SanFrancisco, Box7702, SanFrancisco
P.O.
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(415) 544·2184.
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