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Productivity Growth in the Advanced Economies: The Past, the Present, and Lessons for the Future s Jason Furman Chairman, Council of Economic Advisers Peterson Institute for International Economics July 9, 2015 Labor Productivity Data are Notoriously Volatile U.S. Labor Productivity Growth, 1950-Present Percent, Annual Rate 15 5-Year Moving Average 10 5 0 Quarterly Growth -5 -10 1950 1960 1970 1980 1990 Note: Data reflect quarterly releases of labor productivity for the nonfarm business sector. Shading denotes recession. Source: Bureau of Labor Statistics. 2000 2015:Q1 2010 1 Three Periods of U.S. Productivity Growth U.S. Labor Productivity Growth 15-Year Centered Moving Average of Annual Percentage Growth 3.5 1948–1973: 2.9 percent per year 3.0 1995–2014: 2.2 percent per year 2.5 2.0 15-year centered moving average 1.5 1.0 1950 1973–1995: 1.5 percent per year 1960 1970 1980 1990 2000 2010 Note: This figure—and all subsequent references to U.S. labor productivity reported by the Bureau of Labor Statistics in these remarks—references real output per hour worked in the private nonfarm business sector (excluding government enterprises). The dotted lines divide the last 60 years into three periods that broadly reflect three "episodes" in productivity growth for the private nonfarm business sector. 2 Source: Bureau of Labor Statistics. Three Periods of U.S. Productivity Growth Labor Productivity Growth, 1950-2014 15-Year Centered Moving Average of Annual Percentage Growth 9 8 7 United States 6 5 4 3 2 1 0 1950 Source: Conference Board; CEA calculations. 1960 1970 1980 1990 2000 2010 3 Most G-7 Nations Have Seen Declining Productivity Since the 1970s Labor Productivity Growth, 1950-2014 15-Year Centered Moving Average of Annual Percentage Growth 9 France Italy United Kingdom Canada Japan United States Germany 8 7 6 5 4 3 2 1 0 1950 Source: Conference Board; CEA calculations. 1960 1970 1980 1990 2000 2010 4 All G-7 Economies Have Seen Slower Productivity Growth in this Recovery Labor Productivity Growth in the G-7 Percent Change, Annual Rate 5 4.5 4.0 4 1950-2007 2010-2014 3.5 3.2 3 2 1 2.5 2.2 1.9 1.1 0.8 0.7 0.6 0.4 0 -1 0.0 Canada Germany United States France Japan United Kingdom 0.0 Italy Note: For all nations except the United States, productivity growth rates are those reported in the Conference Board Total Economy database; for the United States, the Bureau of Labor Statistics’ productivity series for the private nonfarm business sector is used. Source: Conference Board; CEA calculations. 5 Most Historical Variation in U.S. Productivity Growth is Accounted for by TFP Sources of Productivity Growth Over Selected Periods Percentage Points, Annual Rate 3.5 3.0 Total Factor Productivity 2.9 Capital Intensity 2.5 2.0 Labor Composition 2.2 2.2 1.1 1.2 0.9 0.9 1.9 1.5 1.5 0.4 1.0 0.5 0.9 0.8 0.0 0.2 0.2 0.3 0.2 1948-1973 1973-1995 1995-2014 1948-2014 Note: Displayed series are the contributions to labor productivity growth in the private nonfarm business sector. Source: Bureau of Labor Statistics; CEA calculations. 6 But the Recent Slowdown is Mostly the Result of Capital Deepening Sources of Productivity Growth, 1948-2007 vs. 2010-2014 Percentage Points, Annual Rate 3.0 2.5 2.0 1.5 2.3 0.2 0.9 Capital Intensity 1.0 0.5 Labor Composition 1.2 Total Factor Productivity 0.2 0.6 0.0 -0.5 0.7 -0.2 1948-2007 Note: Displayed series are the contributions to labor productivity growth in the private nonfarm business sector. Source: Bureau of Labor Statistics; CEA calculations. 2010-2014 7 The Productivity Slowdowns in Canada, Germany, and Japan Have Also Been Investment-Driven b) Sources of Productivity Growth: Germany a) Sources of Productivity Growth: Canada Percentage Points, Annual Rate 2.5 Percentage Points, Annual Rate 1.5 2.1 1.2 2.0 0.6 0.5 0.6 0.0 0.7 0.9 1.0 1985-2007 Capital Intensity Total Factor Productivity & Labor Composition 1.5 Capital Intensity 0.3 1.0 0.6 2010-2013 0.5 0.0 c) Sources of Productivity Growth: Japan 1.4 1985-2007 1.0 0.1 Total Factor Productivity & Labor Composition 0.9 2010-2013 Percentage Points, Annual Rate 3.0 2.5 2.0 2.5 1.3 1.5 1.0 0.5 0.0 1.2 Capital Intensity Total Factor Productivity & Labor Composition 0.8 0.8 1985-2007 2010-2013 Note: Total labor productivity growth and total multifactor productivity growth (including labor composition changes) for the displayed nations are reported by the OECD. The contribution of capital deepening is inferred as the difference between the two. 8 Source: Organisation for Economic Co-operation and Development. But Lower TFP Growth Explains Most of the Slowdown in France, Italy, and the United Kingdom d) Sources of Productivity Growth: United Kingdom e) Sources of Productivity Growth: France Percentage Points, Annual Rate 2.5 Percentage Points, Annual Rate 2.5 2.2 2.0 0.8 Capital Intensity 1.4 Total Factor Productivity & Labor Composition 1.5 1.0 0.5 0.0 2.0 1.5 -0.1 1.0 -0.3 1985-2007 0.8 0.2 0.5 -0.5 -1.0 2.0 2010-2013 0.0 f) Sources of Productivity Growth: Italy 1.2 Capital Intensity Total Factor Productivity & Labor Composition 0.8 0.4 0.4 1985-2007 2010-2013 Percentage Points, Annual Rate 1.5 1.2 1.0 0.7 0.5 0.6 0.0 Capital Intensity Total Factor Productivity & Labor Composition 0.1 0.5 -0.3 -0.5 1985-2007 2010-2013 Note: Total labor productivity growth and total multifactor productivity growth (including labor composition changes) for the displayed nations are reported by the OECD. The contribution of capital deepening is inferred as the difference between the two. 9 Source: Organisation for Economic Co-operation and Development. Capital Deepening Has Slowed Across the G-7 Capital Deepening in the G-7 Percent Increase in Capital Intensity, Annual Rate 5.0 4.5 4.0 1985-2007 2010-2013 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Canada France Germany Italy Japan United United Kingdom States Note: Capital intensity is defined as capital services per hours worked of all persons. Capital deepening is the percent increase in capital intensity. Source: Organisation for Economic Co-operation and Development; CEA calculations. 10 Labor Productivity and TFP Usually Move Together, but Diverged Around the Crisis Labor Productivity and Major Components Percent Change, Annual Rate (5-Year Centered Moving Average) 6 5 Labor Productivity 4 Capital Intensity 3 2 1 0 Total Factor Productivity -1 -2 1950 1960 1970 Note: Capital intensity is defined as capital services per hour worked. Source: Bureau of Labor Statistics; CEA calculations. 1980 1990 2014 2000 2010 11 TFP is a Better Predictor of Future Productivity Growth After Adjusting for Factor Utilization Correlation of Five-Year Productivity Growth with Prior Five Years' Growth in Potential Predictors Correlation Coefficient 0.50 0.40 0.33 0.30 0.20 0.16 0.15 0.10 -0.17 0.00 -0.10 -0.20 Labor Productivity Growth Total Factor Utilization-Adjusted Productivity Growth TFP Growth Capital Deepening Potential Predictors (5-Year Periods) Note: The displayed correlation coefficients result from the comparison of a five-year moving average of labor productivity growth with a five-year lag of five-year moving averages of the potential predictors. Accordingly, they reflect the ability of the predictors averaged from years t to t+4 to predict labor productivity growth from years t+5 to t+9. Source: Bureau of Labor Statistics; Federal Reserve Bank of San Francisco; CEA calculations. 12 Trailing Averages of Productivity Growth are Better Predictors When the Historical Window is Longer Average Absolute Forecast Error from Using Trailing Average Productivity Growth to Forecast the Next Five Years Percentage Points 1.25 1.00 0.96 0.87 Labor Productivity Total Factor Productivity 0.87 0.83 0.68 0.75 0.69 0.84 0.64 0.73 0.60 0.50 0.59 0.48 0.25 0.00 1 3 5 10 Trailing Average Horizon (years) 20 40 Note: This analysis follows the general methodology adopted in Goldman Sachs Research. 2014. “US Daily: Trend Productivity Growth: 2% Still Seems About Right (Mericle).” The displayed values are the average absolute difference between trailing averages of growth in the given productivity series (for the given horizon) and averages of the next five years’ growth in the given series, from 1988 to 2008. This is the longest period over which the calculation can be performed for a forty-year time horizon. 13 Source: Bureau of Labor Statistics; CEA calculations following Goldman Sachs (2014). OECD: Firms at the Productivity Frontier Have Seen Continued Robust Productivity Growth Labor Productivity: Manufacturing Sector Index (2001=0) 0.5 Index (2001=0) 0.5 Labor Productivity: Services Sector 2009 0.4 0.4 2009 0.3 Frontier firms (3.5% per year) All firms (1.7% per year) Frontier firms (5.0% per year) 0.2 0.2 All firms (0.3% per year) 0.1 0.1 0.0 0.3 Non-frontier firms (0.5% per year) 2001 2002 2003 2004 2005 2006 2007 2008 0.0 2009 -0.1 Non-frontier firms -(0.1% per year) 2001 2002 2003 2004 2005 2006 2007 2008 2009 Note: These figures are adapted from the OECD’s 2015 work The Future of Productivity. “Frontier firms” corresponds to the average labor productivity of the 100 globally most productive firms in each 2-digit sector. “Non-frontier firms” is the average of all other firms. “All firms” is the sector total. Source: Organisation for Economic Co-operation and Development. 2015. The Future of Productivity. Andrews, D., C. Criscuolo and P. Gal (2015). “Frontier firms, technology diffusion and public 14 policy: micro evidence from OECD countries,” OECD Mimeo. Productivity Growth in the Advanced Economies: The Past, the Present, and Lessons for the Future s Jason Furman Chairman, Council of Economic Advisers Peterson Institute for International Economics July 9, 2015