Productivity and Growth

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Has a failure to invest sufficiently in air-traffic control systems harmed the U.S. economy through congested airports and flight delays? For different perspectives, visit the National Air Traffic Controllers Association and the Center for Advanced Aviation System Development (CAASD), sponsored by the Federal Aviation Administration. For airline "on-time statistics" among airports, visit the Office of Airline Information, a part of the Department of Transportation's Bureau of Transportation Statistics (BTS).

Case Study Interactive Examples

Case: Computers and Productivity
Half of the Americans using computers are under 17 years of age. Hence, designing learning tools to take advantage of this competency with computers is itself a growing industry. Visit Cooperative Media Group, a developer of educational and entertainment new media.

Case: Picking Technological Winners
For information about the Advanced Research Projects Agency (ARPA), the central research and development organization for the Department of Defense, visit ARPA. For information about Intel Corporation, visit "Welcome to Intel." For information about Sematech, a consortium of American semiconductor manufacturers, visit Sematech.

"Using the Internet" Problems

Visit "A Word from Wall Street," a monthly survey of sixteen Wall Street economists performed by BankAmerica Corporation. Review "Survey on the State of the Economy One Year Out." Which is more likely: The economy one year from today will be experiencing a boom, healthy growth, slowdown, or stagflation? Review other materials derived from this survey. What is the reasoning behind this prediction?

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Living and Dying by Industrial Policy

Japan used industrial policy for many years, and many attribute Japan's rise since World War II to this policy. Japan's Ministry of International Trade and Industry (MITI) has helped identify and support many industries and technologies that became important. Many argue that MITI has been crucial in Japan's success in areas such as electronics and computers. But not all of MITI's plans have succeeded. In the early 1980s MITI pushed Japanese firms to invest in producing memory (RAM) chips for computers. The U.S. Commerce Department also urged U.S. firms to focus attention on RAM chips. The Japanese firms did as MITI suggested, but most U.S. firms did not take the advice. Instead, U.S. firms focused on integrated circuits. Over the last eight to ten years, the integrated circuit market has been more lucrative than the RAM market. Consequently, the U.S. semiconductor industry strengthened relative to the Japanese industry, largely as a result of American success in integrated circuits.

Question to Think About: Would you have more confidence in the judgment of someone who invests his or her own funds or someone who invests taxpayers' money?

Productivity Growth and Different Types of Research and Development

Research and development activity is not homogeneous. Some R&D is directed toward basic research and some toward applied research. Another distinction can be made between research directed toward the development of new products and research directed toward improving production processes. It is likely, as Albert Link found, that R&D expenditures allocated to process innovations had a greater impact on productivity than R&D expenditures allocated to product innovations. (See Albert N. Link, "A Disaggregated Analysis of Industrial R&D," in The Transfer and Utilization of Technical Knowledge. Edited by Devendra Sahal. Lexington, MA: D. C. Heath, 1982.)

Question to Think About: Would the development of a new computer system be considered a product innovation or a process innovation?

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Topic: OECD Forecasts Slower Growth in 1999 for Industrial Nations

The Organization for Economic Cooperation and Development (OECD), a Paris-based research and policy group, predicts that growth in industrial economies around the world will slow next year, partly in response to troubles in Asia. OECD has scaled back growth estimates made last March. For example, the group predicted in March that the U.S. economy would be largely immune from economic troubles affecting Asia. But now OECD is predicting annual growth of only 0.9% for the first half of the 1999 and only 1.5% for 1999 as a whole-less than half the growth rate expected for 1998. OECD's darkest outlook was for Japan, where the economy is expected to shrink by 2.8% in 1998 and grow just 0.2% in 1999 and 0.7% in 2000. According to OECD, "The economic situation in Japan is grave" with rising bankruptcies, falling exports, flagging consumer confidence, and reduced availability of bank credit. In October 1998, housing starts in Japan fell 13% below the level from the year before, the 22nd year-over-year decline in a row. The picture for Europe looks far brighter, with a growth forecast of 2.8% in 1998 and 2.2% in 1999. The Internet address for the OECD is www.oecd.org.
(Updated 12/1/98).

Topic: U.S. Productivity Surges in Third Quarter of 1997

One major theme of this chapter is the decline in U.S. labor productivity since 1973 compared the period 1948 to 1973. Preliminary figures indicate that nonfarm productivity, measured as the growth in output per hour of labor, grew by 4.5% annual rate in the third quarter of 1997, the highest growth rate since the final quarter of 1992, when the rate rose 5.9%. The 4.5% third quarter growth rate follows a growth of 2.4% in the second quarter. Productivity growth over the last year has averaged 2.5%, nearly twice the growth of 1.3% for all of 1996 (and an average of 1.0% since 1993). As the chapter notes, growing productivity is the key to a rising standard of living. If workers produce more per hour, firms can raise wages without raising prices, so the wage increases allow workers to buy more goods and services. Productivity in the manufacturing sector grew 9.8% in the third quarter, the fastest growth rate since the 12.5% jump in the second quarter of 1982. Keep in mind that these productivity figures are preliminary and are therefore subject to revision as more and better information becomes available. Also keep in mind that a change for a quarter or even a year doesn't constitute a change in the trend. Economists are cautious in interpreting figures from the most recent quarter or even the most recent year as evidence of a turnaround in U.S. productivity; they prefer to look at evidence for five years or more before drawing conclusions.
(Updated 11/17/97)

Topic: Quarterly Productivity Growth

Labor productivity, which measures how much U.S. workers produce in an hour on the job, grew by only 0.6% in the second quarter of 1997. Federal statisticians also revised downward their estimate of first quarter productivity growth to 1.4%, well below the 2.4% originally reported. Between 1947 and 1973, U.S. productivity growth averaged 2.8%, during what is now considered to be the golden age of productivity growth. Since then, productivity has grown at only about 1.0% on average. For the last 12 months, productivity has grown at only 0.7%. Productivity growth is much higher in the manufacturing sector, where it grew 3.2% in the second quarter, up from 2.5% in the first quarter. The higher growth in manufacturing means that productivity growth in the service sector must be much lower. Some economists have criticized the way federal statisticians collect their data, noting that figures do not properly take into account productivity growth in the service sector. These critics argue that the widespread use of computers must be having more of an impact on labor productivity than is reflected in the current data (see the first case study in this chapter entitled "Computers and Productivity"). But federal statisticians say they are using the best available data and a widely accepted methodology to compute productivity growth. Increases in the rate of growth of productivity are key to a rising standard of living.
(Updated 8/26/97)

Topic: Growth in Real GDP Slows in Second Quarter

After growing at an annual rate of 4.9% in the first quarter, the pace of the U.S. economy slowed to 2.2% in the second quarter of 1997, based on real GDP. Real GDP measures the market value of all final goods produced in the economy after accounting for inflation. One reason for slow growth in the second quarter is that real personal consumption slowed to an estimated 0.8% in the second quarter after growing 5.3% in the first quarter. The slowing of consumption could be traced to a drop in durable goods purchases. But the slowing of the rate of growth in consumer spending was to some extent offset by an increase in business investment, which jumped 20.4% after a 6.7% rise in the first quarter. Companies continue to invest in capital goods, such as computers, that will enhance worker productivity. The current economic expansion is now in its seventh year.
(Updated 8/11/97)

Topic: Update on Labor Productivity in 1996

The U.S. Labor Department has now revised its preliminary estimate for the growth in labor productivity in 1996 from 0.8% to 0.7%. The was the largest increase since a 3.2% rise in 1992. In the final quarter of 1996, labor productivity grew at an annual rate of 1.1% (only half the 2.2% originally reported). Labor productivity measures output per work hour. Between 1972 and 1995, labor productivity grew at an average annual rate of 1.2%, which was less than half the 3.0% growth rate between 1948 and 1972. Thus the experience for 1996 is consistent with the slower growth rate since 1972. Some economists believe that labor productivity in recent years has grown faster than officially reported. These skeptics claim that government statisticians have failed to capture the real growth in services.
(Updated 3/13/97).

Topic: Labor Productivity in 1996

According to the U.S. Labor Department, labor productivity outside the farm sector grew 0.8% in 1996, up from 0.3% in 1995, and the highest since the 3.2% rise in 1992. Labor productivity grew 2.2% in the fourth quarter of 1996, a sharp improvement from the third quarter when productivity was flat. Growth in the fourth quarter was the highest since a 2.8% growth in the fourth quarter of 1993. The gross domestic product grew 4.7% in the fourth quarter of 1996. Labor productivity is the output per unit of labor and is measured as total nonfarm output divided by the number of units employed to produce that output. Between 1972 and 1995, labor productivity grew by an average of 1.2%, less than half the average growth rate of 3.0% between 1948 and 1972. So the experience in 1996 is consistent with the slowdown in productivity growth witnessed since 1972.
(Updated 2/17/97)

Topic: Growth in the Personal Computer

Sales of personal computers increased about 18% worldwide in 1996, according to market reports published in January of 1997. The number of personal computers shipped increased to 70.9 million in 1996, from 60.2 million in 1995. The share of Apple Computer, now the fourth-largest personal computer maker, dropped to 5.2% of the market. Compaq Computer contiued to dominate the world market by selling 7.1 million computers, or 10.1% of the world market. Compaq sales grew by 18.5% in 1996. IBM ranked second with 8.6% of the market and a 28% growth rate in 1996. The first case study in Chapter 6 examines the link between computers and productivity. Economists wonder when the growth in the sales and use of computers will begin showing up in labor productivity statistics. It's been said that we can see computers everywhere except in productivity growth.
(Updated 1/30/97)

Topic: Growth in Labor Productivity

Several weeks ago the U.S. Labor Department reported that labor productivity in the third quarter of 1996 increased 0.2%. That figure has now been revised downward to a decline of 0.3%. The downward revision was due to a lowered estimate of GDP growth in the third quarter, from a preliminary estimate of 2.3% to a revised estimate of 1.8%. Productivity measures output per hours worked. In the third quarter the total number of hours worked increased 2.1%. Because the increase in hours worked exceeded the increase in real GDP (1.8%), labor productivity declined. During the first quarter labor productivity increased 1.9% and during the second quarter it increased 0.6%, so the average productivity increase for the first three quarters was about 0.7%. Many economists believe that the Labor Department underestimates productivity, especially in the service sector, where output is often difficult to define.
(Updated 12/13/96)

Topic: Labor Productivity

The U.S. Labor Department reported that nonfarm labor productivity, which measures output per work hour, increased at an annual rate of only 0.2% in the third quarter of 1996; this was down from an annual increase of 0.5% the quarter before.The growth in labor productivity is a key to a rising standard of living.

The 0.2% rise in third quarter productivity was the slowest rate since the 1.1% decline in labor productivity experienced during the final three months of 1995. Labor productivity has grown by an annual average of 1% between 1973 and 1995; this was only about one third the rate of growth experienced during the 1950s and 1960s. Higher labor productivity means businesses can increase wages without raising prices, since workers can produce more with the same amount of work.
(Updated 11/15/96)