FRBSF Economic Letter
2005-05; March 11, 2005
Gains in U.S. Productivity: Stopgap Measures or Lasting
Change?
The performance of productivity in the U.S. economy has
delivered some big surprises over the last several years.
One surprise was in the latter half of the 1990s, when
productivity growth surged to average an annual rate of
over 3%, more than twice as fast as the rate in the previous
two decades. A bigger surprise has been the further ratcheting
up of productivity growth since the most recent recession.
Even with a slowing to below a 1-3/4% annual pace in the
second half of last year, productivity growth averaged
around 3.8% for the 2001 through 2004 period. That is an
extraordinarily high number by historical standards. It
also is well above the consensus view among economists,
which is that trend growth of productivity is on the order
of 2-1/2% (see Yellen 2005).
Although considerable research
has uncovered the primary drivers of the late 1990s surge
in productivity growth,
the factors pushing productivity growth above its presumed
trend in more recent years are less well understood. One
possibility is that the very rapid pace of productivity
growth since the recent recession reflected the lagged
effects of past capital investment and increased efficiency
in workplace organization. In that case, gains in the level
of productivity should stick, as its growth proceeds closer
to trend. Another possibility, however, is that a significant
portion of the extraordinary gains reflected stopgap measures
that gave only a temporary boost to productivity. For example,
since the recession, it has been common to hear stories
about "business caution" brought on by an environment
still jolted by the effects of September 11, 2001, the
wars in Afghanistan and Iraq, the IT bust, and corporate
governance scandals. This caution may have led businesses
to meet increases in demand by pushing their existing workers
harder, perhaps to unsustainable levels, rather than by
hiring more workers. Therefore, as businesses become more
confident and expand hiring, the unwinding of the earlier,
temporary gains in productivity would push productivity
growth below its underlying trend. This Economic Letter uses state-level data to contribute to the analyses of
the drivers of gains in U.S. labor productivity
since 2000—stopgap measures among cautious employers
or more lasting changes. While the nation has had a so-called
jobless recovery, many states posted net job gains early
in the recovery and regained previous peaks in employment
levels well ahead of the nation. Comparing states with
and without job recoveries, we find no significant difference
in productivity growth. The results indicate that differences
in demand (output) rather than differences in productivity
growth have been the primary drivers of job growth across
states. Moreover, the breadth of the gains in the level
of productivity suggests that they will be long-lasting.
Growth
in U.S. productivity and labor inputs
 Figure 1 plots
U.S. labor productivity growth, growth in nonfarm payroll
employment, and average weekly hours worked.
As the figure illustrates, during the latter half of
the 1990s, jobs and productivity grew rapidly as the nation's
growth frenzy made workers hard to find and led firms
to
add capital equipment quickly to meet surging demand.
After 2001, in contrast, the further accelerations in productivity
growth were accompanied by languishing national employment
until late in 2003. Moreover, unlike the jobless recovery
of the early 1990s, this cycle saw average weekly hours
for production and nonsupervisory workers edge down,
not
up. This combination of enduring rapid productivity growth
and the edging down of average weekly hours seems to
support the view that gains in the level of productivity
were probably
not largely the result of temporary, stopgap measures.
Digging
beneath the aggregate U.S. data, a number of studies
have examined the rise in the growth of labor productivity
in the latter part of the 1990s using industry-level
data.
These studies find that the acceleration was broad-based,
with most major industry groups participating. In addition,
the industry-level studies also have helped sort out
the causes of the acceleration, finding that investment
in
information technology (IT) played an important role
in most industries (Stiroh 2002, Fernald and Ramnath 2003).
The breadth of the productivity growth acceleration convinced
many that the gains were more permanent. Evidence from state-level
data
Like industry-level data,
state-level data give us multiple observations of the
relationships among output, productivity,
and employment growth for a given time period. Since
state economies are not perfectly synchronized with the
national
business cycle, state patterns give us some further insight
into the future paths of productivity growth.
In using
state data, we define labor productivity as the real
value of output per worker. Specifically, we define
productivity as the value of real output (value-added
output) produced by nonfarm industries in each state, divided
by
the number of workers employed by the respective industries
in each state. The data on job counts are from the nonfarm
payroll employment series released by the Bureau of Labor
Statistics (BLS). The data for real output by state through
2002 are from the Bureau of Economic Analysis (BEA).
The data for real output by state for 2003 and 2004 are
estimated
by the Federal Reserve Bank of San Francisco; estimated
growth rates are available on the Quick Stats page of
the website for the Center for the Study of Innovation
and
Productivity, www.frbsf.org/csip.
Although the BEA and FRBSF data are computed differently
from the BLS productivity
data, when aggregated, these measures of output per worker
closely track the pattern for the nation's productivity
growth shown in Figure 1.
 The first question we ask is:
was the pickup in U.S. average productivity growth after
2000 geographically widespread
or concentrated in relatively few states? Figure 2 provides
an answer by plotting average annual productivity growth
over the period 1997 through 2000 compared with the period
2001 through 2004:Q3. (For the nation, estimates suggest
that an acceleration in productivity growth began in
1997; see Edge, Laubach, and Williams 2004 for a detailed
description
of this trend break.) Points above the 45-degree line
represent states (including the District of Columbia) that
experienced
acceleration in productivity growth in the latter period.
Clearly,
the majority of states did experience an acceleration
in productivity growth in the 2001 through 2004:Q3 period,
including those with very different economic makeups,
such
as Florida, Hawaii, New York, Tennessee and Wyoming.
Among the states that did not realize an acceleration in
productivity
growth, most posted relatively strong gains in the 1997-2000
period. It is worth noting that some of the latter states
are significant IT centers, such as California, Colorado,
Massachusetts, and Washington, and their relatively strong
productivity gains in the earlier period coincided with
the IT boom; this productivity growth advantage unwound
to an extent in recent years as the IT sector turned down.
The
next question is: does the pickup in productivity growth
among so many states with diverse economic makeups suggest
fundamental, long-lasting improvements in the level of
productivity or the temporary, albeit broad-based, effects
of business caution? We address this question by examining
the relation between productivity and job growth across
U.S. states during the 2001 through 2004 period. As of
September 2004, nonfarm payroll jobs were at or above
the pre-U.S. recession levels for 21 states, which account
for a little over one-fourth of total nonfarm payroll
employment
in the U.S. If the acceleration in productivity growth
had been due largely to cautious employers pushing their
existing workforces harder, we would expect to see some
negative correlation between employment growth and productivity
growth across states—in other words, either faster employment
growth and slower productivity growth or vice versa.
The idea is that, if a firm had confidence to expand employment,
it would be less likely to engage in stopgap measures
to
raise productivity.
What do the data show? For the period 2001 through 2004,
we find no statistically significant relationship between
productivity growth and employment growth across the
U.S. states. To account for possible differences in underlying
productivity, employment, and output growth, we also
examined
the relationships in the changes in these growth rates
in recent years compared to previous periods. That analysis
indicates positive but generally not statistically significant
correlations between changes in employment and productivity
growth. The absence of a negative relationship between
productivity growth and employment growth is consistent
with a wide range of firms working to make long-lasting
improvements in efficiency.
 Indeed, it appears that the states' employment growth rates
in recent years have been related to output growth, rather
than to productivity growth. This can be seen in Figure
3, which shows average productivity, employment, and output
growth (GSP, or gross state product) for states that had
not recovered jobs lost during the recession and those
with employment levels at or above pre-recession levels.
Average productivity growth across these groups is virtually
the same (not different statistically). Employment and
output growth, on the other hand, diverge, with fast growing
states posting solid job growth, while the other states
on balance have had jobless recoveries. For many firms,
the gains in productivity have been sufficiently large
to meet demand for their products, while firms facing stronger
demand have been willing to hire new workers to meet it.
What does this mean for the future?
The state-level data tell us that the U.S. productivity
surge and coincident sluggish job growth in the recent
recovery were not necessarily parts of the same phenomenon.
The enormous gains in efficiency in the U.S. were pervasive
among the states and not correlated with job growth. This
is consistent with the view that the gains in the level
of productivity we have observed are lasting and unlikely
to be unwound substantially once employment growth picks
up.
That does not mean that the growth rate of productivity
will move back up to the elevated average pace seen in
recent years. Even if the gains in the level of productivity
realized over the past several years are retained, progress
toward still higher levels of efficiency could come more
slowly. Indeed, sustaining productivity growth at an
average pace of close to 4% per year would be remarkable
by historical
standards. For example, if some of the very rapid pace
of productivity growth during the recent recovery were
the result of lagged effects from past investments in
technology and changes in workplace practices, a diminution
of those
effects could mean slower productivity growth going forward.
That said, evidence from the state data raises doubts
that take-backs from earlier productivity gains will constitute
a significant factor pushing productivity growth below
its long-run trend.
Mary Daly
Vice President |
Fred Furlong
Group Vice President |
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of the Federal Reserve Bank of San Francisco or of the
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