For the public, it might seem that economists overemphasize the importance of business productivity improvements as an explanation for the well being of the economy.
Nonetheless, a country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
At the firm level, productivity is usually calculated as the ratio of output to inputs used in production. At the economy level, an increase in productivity (narrowly defined here in terms of output per hours worked) is generally associated with the potential to increase the standard of living of the workforce, but as well, potentially increase profits for the firms experiencing productivity growth.
In other words, productivity growth is important since it provides insights into general economic growth, the competitiveness of the economy, and the living standards within an economy. The pace of productivity growth also shapes the possibilities of achieving social objectives, if society so chooses.
A simple glance at the accompanying chart indicates that productivity growth has been slowing over the past 17 years, from well over a 2% annual increase to a recent average growth rate of about 1%. Of course, this longer-term stagnation in productivity growth has been associated with the recent slowing of U.S. potential real GDP growth to half or less of its historical pace.
However, since the American economy started to improve last year, productivity growth has also been improving. Non-farm productivity advanced 1.5% from the third quarter of 2016 to the third quarter of 2017. As well, the acceleration in productivity growth was associated with declining unit labor costs.
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