Raising Productivity Growth

Courtesy of the McKinsey Global Institute, here is an interesting new contribution to the debate kicked off by Tyler Cowen's The Great Stagnation. This new MGI report -- entitled "Growth and renewal in the United States: Retooling America's economic engine" -- doesn't mention Tyler's book, but it offers evidence that supports his argument -- as well as that of his critics. On the one hand, MGI makes a strong case that we are facing strong headwinds when it comes to prospects for future growth. On the other hand, contrary to Tyler, the report points out that there's plenty we can do about it.

The MGI report singles out demographics as the main obstacle to future growth, and it makes a strong case. Think about per-capita GDP growth as a function of two variables: growth in output per worker-hour (i.e., productivity growth) and growth in total worker-hours per capita. If the latter slows down, the former has to speed up for growth to stay on trend. According to MGI:

Today, however, the contribution from labor is slowing down as baby boomers retire and the female participation rate has plateaued. In the next ten years, the proportion of working-age Americans will decline from 67 percent to 64 percent. By the 2020s, the contribution of labor to US GDP growth rates is expected to decline to just 0.5 percent from a peak of 2.0 percent in the 1970s.

Accordingly, to avoid a dropoff in the long-term growth rate, labor productivity growth needs to compensate for the unfavorable demographic situation. Specifically, the MGI report says that output per worker-hour would need to increase by nearly a quarter to maintain the historical average of 1.7 percent annual growth in real GDP per capita.

Unlike Tyler, though, the folks at MGI don't think the orchard of "low-hanging fruit" is bare.  They see plenty of opportunities to boost productivity: diffusion of existing best practices, implementation of the next wave of emerging business innovations, and restructuring of low-productivity and highly regulated sectors (namely, education and health care) all offer promising gains. 

In addition, the report helpfully points out that our demographic situation is not unalterable. If the United States could achieve the same labor force participation rates for women and workers 55-64 as Sweden, the same youth unemployment rate as the Netherlands, and the same immigration rate as Australia, it could expect to add a full percentage point to its real GDP growth rate over the next 10 years. 

On a critical note, the MGI report is sometimes frustratingly short on specifics. In particular, it's much too vague in addressing what needs to be done to boost the abysmal productivity record of the health and education sectors. Nonetheless, it does frame the issue well -- and points the discussion in a more constructive direction than Tyler's fatalism.

Comments

[Alan Harvey]

Unfortunately for this effort, productivity is directly tied to unemployment. As I have shown here: http://www.demandsideeconomics.net/2009/08/multifactor-productivity-explained.html

virtually all productivity gains up to 2007 can be correlated directly to low unemployment. Managers are motivated to utilize labor as efficiently as possible when unemployment is low.

It also seems to me that the growth fetishism is misplaced in a world rapidly coming to its environmental brink. That growth will slow does not seem to me to be a bad thing.

[New Era Hats]

Thanks for sharing!