Productivity Gains
Subject Productivity
Topic Productivity and Growth
Key Words Productivity, Growth, Standard of Living, Inflation
News Story

The US Commerce Department reported that the productivity of American workers rose in the second quarter of 2001 at an annual rate of 2.5 percent. Because of the economic slowdown, analysts had expected a smaller rate of growth. The increase in productivity compares to a revised annual average of 2.6 percent for the 1997 to 2000 period. In the first quarter of 2001 productivity grew at an annual rate of 0.1 percent.

Productivity data are considered to be one of the most important indicators of the economy's potential for economic growth. When productivity is increasing rapidly, both corporate profits and workers' wages can increase without causing inflation to accelerate. Federal Reserve Board Chairman Alan Greenspan believes that technological advances have made American companies more efficient. Because productivity increases reduce the pressure on firms to raise prices when their labor costs rise, the Fed believes that it has greater latitude to pursue a low-interest-rate policy. During the 1972 to 1995 period, worker productivity averaged 1.2 percent per year. Since 1995 productivity growth accelerated. Previous estimates had productivity increases at 3.2 percent annually, but the Bureau of Labor Statistics revised its data and lowered the rate of increase to 2.6 percent.

Historical trends associate a slowdown in the economy with a decrease in productivity. The absence of economic growth during the second quarter coupled with the surprisingly strong productivity data support the contention of some analysts that the economy has undergone a significant transition and the increased emphasis on technology and flexible labor markets have made American firms more productive than before. During the April - June period companies reduced their labor force and cut back on the number of workers' hours because of the decreased demand for their goods. In spite of the smaller work force, American firms produced virtually the same output but with greater efficiency. If this quarter's productivity gains reflect structural changes in the economy rather than merely a cyclical phenomenon, the long-term average growth of the economy could be as high as 3.5 percent, according to some analysts.

(Updated September 1, 2001)

1. How is productivity measured?
2. Analysts believe that productivity measures are subject to many measurement errors. What are some of the problems that could be encountered measuring productivity?
3. Explain why increases in productivity reduce the need for firms to raise prices when their labor costs increase.
4. What factors are responsible for the increase in productivity in the post-1995 period?
Source David Leonhardt, "Productivity Still Gaining Despite Slump," The New York Times, August 8, 2001.

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