In a Jan. 3 farewell speech in Philadelphia, outgoing Federal Reserve Chairman Ben Bernanke admitted that one aspect of the current economic recovery leaves him stumped: weak growth in productivity.
“Disappointing productivity growth,” Bernanke said, “must be added to the list of reasons that economic growth has been slower than hoped.” Unlike the other reasons—the faltering Euro, for instance, or ill-timed state and federal spending cuts—weak productivity growth was an unknown factor until this past November, when earlier data were recalculated—“an illustration,” Bernanke said, “of the frustrations of real-time policymaking.”
Because of weak productivity growth—that is, weak growth in output per worker per hour—Gross Domestic Product is about 7% below where it should be, according to Fed economists.
Until the recent data revision, productivity growth was one of the long-term bright spots in the economy. After tanking between 1973 and 1995, productivity growth rebounded to levels comparable to the booming post-World War II years, probably because of efficiencies generated by the World Wide Web. Nobody worried that productivity growth was too slow; instead, many worried that median income growth wasn’t keeping up with productivity growth, as it had during the postwar boom. (Indeed, in almost every year since 1999, pre-tax median household income has been declining.)
Rising productivity growth unaccompanied by a comparable rise in incomes for the typical American family is a problem. But slackening productivity growth creates a different problem: it limits the extent to which, even theoretically, wages can rise.
Why has productivity growth slowed down? The reasons, Bernanke said, “aren’t entirely clear.” One possibility, he said, is that tight credit is inhibiting innovation. Another is that weak sales have inhibited hiring and investment. Bernanke also raised the possibility that the slowdown is caused by unspecified “longer-term trends unrelated to the recession.” Long-term unemployment may be contributing to it. Since your likelihood of staying in the workforce recedes the longer you’re out of work, Fed economists have suggested, your likelihood of adding to the nation’s output recedes, too. In this sense, “productivity” is just another word for “employability.”
Solving the productivity puzzle will be left to Bernanke’s designated successor, Janet Yellen, assuming her likely Senate confirmation on Jan. 6. If productivity growth doesn’t improve, don’t expect much economic growth in the coming years.