American workers aren’t as productive this year. According to the Bureau of Labor Statistics, nonfarm labor productivity has plunged the most since at least 1947. The third quarter improved slightly over the second quarter but was still far below a year ago. The slump is troubling as labor shortages persist and the emerging hybrid work-from-home model endures its first sustained test under a normalizing covid environment. It also comes on the heels of a decade-long slowing of productivity improvement that already had economists concerned.
Labor productivity is a broad measure of how much economic value the average US worker creates. It is defined as the amount of inflation-adjusted GDP per hour of labor and is a critical factor in the future growth of the economy and the real wages workers can earn. The slowdown is also contributing to current inflation as unit labor costs rose at a 3.5% annual rate in the third quarter despite less output per worker.
Productivity is the biggest single driver of economic growth. The sustainable rate of expansion in GDP is a function of productivity growth plus growth in the labor force, the sum of which equals total economic expansion.
It is no surprise that population growth is slowing. At the same time, the share of the population working or seeking work is contacting, suggesting that the labor force will grow by an anemic 0.4% annually over the next 10 years. With the government’s future estimate for productivity growth at 1.5% per year, this implies that GDP can only expand by 1.9% per year. Increasing legal immigration could help increase the work force and grow the economy but faces political opposition. The other variable, productivity, can be influenced somewhat more over the intermediate term.
Several recent factors may be at play to explain the recent productivity drop. With Covid lockdowns, millions were forced to work from home, triggering a brief spike in productivity as employers invested heavily on technology and workers paddled harder against the stream. Some of the slowdown may simply be a normalization from that temporary surge.