What is Causing Productivity in the United States to Decline?

declineproductivityFor years, rapidly-improving technology and a flourishing corporate culture made the United States a highly prolific nation. From 1995 to the end of 2010, for example, the nonfarm business sector averaged a productivity growth rate of 2.6% per annum. However, more recently, these numbers have begun to drop, averaging only 0.4% in productivity growth since 2010. Even worse, experts say they have no idea what could be causing such a drastic shift.

According to Alan S. Blinder, a professor of economics and public affairs at Princeton University, it is possible that the nothing but a statistical illusion. In an opinion in the Wall Street Journal, titled “The Mystery of Declining Productivity Growth,” Blinder explains that labor productivity growth is calculated as the growth of measured output minus the growth of labor input. As a result, minimizing output growth automatically leads to a lesser level of productivity growth, a consequence that doesn’t lend itself well to a world that increasingly spends time on free online services, which add nothing to our output growth. But Blinder says he isn’t convinced this is the answer.

“To account for a 1.6 percentage-point decline in the productivity growth rate for 10 years, all those new apps, social media and free services would now have to be worth almost $2.5 trillion more per year than in 2005,” Blinder writes. “That’s not believable.”

A second hypothesis blames the economic recession of years past: according to Blinder, productivity skyrocketed in 2009 and 2010, even as the economy weakened, with many American businesses quickly discarding employees while maintaining their existing output. As a result, annual productivity growth surpassed 3% for two years. However, as the economy improved, Blinder notes that most firms had to hire many more employees and increase their work hours. However, he points out that the fact that productivity growth has not returned to a normal rate of 2% or more is telling.

Finally, a third hypothesis points the finger at weak investment. Blinder calls this theory more promising, as capital stock has grown more slowly in recent years, giving workers less new capital to work with, which could potentially cause productivity to improve at a slower rate. However, once again, Blinder says the theory is weakened by the time period. Not only is three years too short a time to draw any conclusions, but preliminary calculations show that weak investment accounts for only about 25% of the decrease in productivity.

But then what could be causing the decline? Studies show that nearly eight of 10 people think unorganized clutter can hamper productivity; are modern offices simply too disorganized or distracting for workers to complete their tasks? In his article, Blinder draws attention to two hypotheses he calls “less conventional, even counterintuitive,” but might be able to explain the change.

The first questionable theory was introduced in a series of papers from a group of researchers, led by John Haltiwanger of the University of Maryland. Over the course of their study, the team found that American businesses are engaged in less churning and labor reallocation than in years past. But while reduced labor market volatility might suggest better conditions for workers, the researchers argue that less churning might indicate less entrepreneurial dynamism, which could hamper improvements in productivity. Blinder points out that areas like Silicon Valley might be an exception to this trend, but the study was national. Currently, the research team has suggested that declining dynamism began in the 1980s, then spread into high-tech industries and possibly accelerated in the 2000s.

However, this theory is more cheerful than the second hypothesis, proposed by John Fernald of the Federal Reserve Bank of San Francisco and Robert Gordon of Northwestern University. Two of the nation’s leading productivity experts, Fernald and Gordon have argued that the greatest improvements in productivity from information technology came years ago, and recent inventions simply haven’t had the same effect. If inventiveness hasn’t waned, perhaps a focus and impact on productivity has.

“Keep in mind that to an economist ‘technological progress’ means getting more output from the same inputs of capital and labor,” Blinder writes. “Does Twitter do that? Or Snapchat? Some popular online services might even reduce productivity by turning formerly productive work hours into disguised leisure or wasted time.”

In the end, none of the hypotheses Blinder mentions seem like the clear problem to the productivity decline: there either hasn’t been enough time to prove the theory definitively, or other contradictory elements cut them out of the running. It is likely, at least, that low investment and the recession could be slowing things down, and just as possible that things could improve in the future. However, until then, Blinder and other experts say there is plenty of reason to worry.