Totally Measured
Subject Total factor productivity
Topic Productivity and Growth
Key Words Productivity, Growth, Labor Productivity, Inflation
News Story

Despite what appears to be a weakening of the economic recovery, labor productivity is still growing, according to a USA Today study. Labor productivity is measured by the U.S. Commerce Department and reported on a quarterly basis. The USA Today study differs from the Commerce Department measure in that it estimates total factor productivity, and it incorporates the effect of investments in technology, plants and better machinery. Furthermore, the total factor productivity measure can be applied at the firm level as well as measuring industry growth. USA Today reported that despite the recession, total factor productivity grew over this past year and can play an important part in fueling the economic recovery.

Productivity is 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 Chairman, Alan Greenspan, remarked in his testimony to Congress that U.S. productivity is likely increasing at an annual rate of 7 percent. This is a remarkably high rate considering that productivity growth in the 1970s averaged 2.8 percent and 2.5 percent from 1980 to the early 1990s. U.S. productivity growth is about twice the rate of that in Europe.

Of the top 100 firms, as ranked by Fortune Magazine, 47 percent saw less of a productivity improvement this year than compared to the previous year, according to USA Today. Last year only 36 percent had lower productivity gains. Of this year's gainers, only 18 had rates above 10 percent, compared with 28 for last year.

Because the total factor productivity measure is influenced by price fluctuations and layoffs, as well as by technological innovation, the list of top productivity firms had some surprises. Oil and energy companies as a group had generally higher productivity growth due to the significant increases in fuel prices. Enron had the highest rate of productivity growth, emphasizing the point that total factor productivity measures must rely on accurate data.

(Updated September 1, 2002)

1. According to the article, how rapidly did labor productivity grow in the 1970s and 1980s?

Nobel winning economist Robert Solow invented the total factor productivity measure to explain why some countries grow faster than others, over time. What is the difference between productivity as measured by the U.S. Commerce Department and the productivity measure that was used by USA Today?


Explain why increases in productivity tend to dampen inflation.

Source Del Jones and Barbara Harsh, "Productivity grows in spite of recession," USA Today, July 29, 2002.

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