Weak productivity growth helps to explain the continued robust rates of job creation in the United States, as well as workers’ sluggish wage gains. If left unresolved, the productivity malaise will ensure that the current expansion remains uniquely unbalanced and unhealthy.
By Larry Hatheway
T
he current US economic expansion is extraordinary. Not only does it rival the longest on post-war record, but, unlike
are hiring strongly despite tepid growth, a dwindling pool of productive workers, and troubling political and policy uncertainty. The soft May jobs report, alone, does not change the decade-long phenomenon of robust employment growth. One plausible explanation is that firms are substituting cheap labor for expensive capital. The share of total worker compensation in US national income has fallen steadily this century, reaching a low of 60% in late 2014, before edging back to its current level of 62%. Yet that is still three full percentage points below its average level between 1965 and 2000. On the other hand, returns on capital are exceptionally high. Since 2010, the share of corporate profits in GDP has reached average levels that are unrivaled in the post-war era. One might think, therefore, that firms would prefer to invest in high-returning capital rather than in labor. But that is not the case. The average annual rate of non-residential gross fixed capital formation since 2009 has been 5.3%, more or less the same as it was in the expansions of the early 2000s and the 1980s, and well below the rate in the investment-led boom of the late 1990s. Why is cheap labor so abundant? Perhaps workers are willing to sacrifice higher wages in return for job security. That’s understandable,
previous periods of sustained growth, it has not unleashed much inflation. Corporate profits have soared to unprecedented levels. And economic inequality in the United States is at its most extreme in a half-century. Each of these unique features is paradoxically linked to another oddity: despite a mostly lackluster expansion since 2009, the US unemployment rate has fallen significantly further than would have been predicted by GDP growth alone. But perhaps the defining aspect of this strange decade-long expansion, and the one that helps to explain its main anomalies, is weak productivity growth. Consider, first, the jobs phenomenon. Using a simple model relating unemployment to GDP growth – similar to Okun’s Law – indicates that the jobless rate has fallen by half a percentage point more per year during this expansion than history would have suggested. Since 2014, the rate of US employment growth has exceeded what GDP growth would have predicted by nearly one million jobs per year. Even as unemployment has fallen to historic lows, job creation remains more than double the rate of increase of the labor force. Firms
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