Economic turning point: Productivity’s down

Kai Ryssdal Jan 23, 2007

KAI RYSSDAL: Imagine the wailing and gnashing of teeth if we were talking about gross domestic product being at a 10-year low. Or the job market.

No, our topic today is productivity. Productivity growth, actually. The rate at which companies increase the number of widgets their workers can crank out.

Sounds daunting, I know. But bear with us. Because in that number lies a key to interest rate increases, higher wages and new jobs all rolled into one.

We’ve called Economist Ken Goldstein at The Conference Board. That’s the group that came out with a report today saying U.S. productivity growth is slipping.

Mr. Goldstein, good to have you with us.


RYSSDAL: Let’s start with the “So what” question. What does it mean that the rate of productivity growth is slowing?

GOLDSTEIN: The economies grow either because we get more people to work or we get them to grow more efficiently. And working more efficiently is what we economists call productivity growth. And what we’re seeing here, both in the United States as well as across the world, is perhaps a change going on. In terms of a little bit slower productivity growth in the United States, a little bit faster growth elsewhere. That comes for a couple different reasons.

RYSSDAL: What might those reasons be?

GOLDSTEIN: If you step back and you look at the long picture here, we had in the United States a 1 percent rate of growth and productivity from about 1960 to about 1995. The rate of growth and productivity is important because it has an influence on how fast the economy goes, how fast inflation goes, how fast our paychecks go up — or don’t. Starting around 1995 and for the last decade or so, we’ve had a growth rate here of about 2.5 percent. This was a strong surge that we saw and it comes out of what we technically call ICT: Information Communication Technology. It brought us this very strong productivity growth, very strong economic growth, low inflation, low interest rates . . . all the stuff that we’ve been talking about for the last 10 years.

RYSSDAL: So can we assume, then, that a slowing rate of productivity growth is an economically bad thing?

GOLDSTEIN: It’s not so much that it’s an economically bad thing is that that 2.5 percent rate of growth couldn’t be sustained. And I think one of the things that’s going on is that long period of being able to use all of this ICT to generate more goods and more services to improve our living standards . . . we’re starting to move down from that pace. It’s almost like a person: you can’t continue to run at the age of 50 the way that you could run when you were 25.

We’re probably not gonna get 2.5 percent productivity growth for the next 10 years, but we’re not going right back to 1 percent. What’s going on elsewhere is that they’re catching up to the way that we’ve been using ICT. That’s why productivity growth in the United States a little bit slower, productivity growth outside the United States a little bit faster right now.

RYSSDAL: Now, is there a way for American companies to capitalize on productivity growth outside the United States by more outsourcing to India, for example?

GOLDSTEIN: That’s exactly why we’re seeing outsourcing, and we’ve been seeing outsourcing, for the last 20 years. One of the points that’s very important here to understand: it’s not just about the growth of the economy, but it’s also about the expansion of the economy. We have stuff that we can buy today, stuff that we can do today, we couldn’t do 10 years ago because we didn’t have the strong productivity growth behind us.

RYSSDAL: What’s this going to mean when the Federal Reserve meets at the end of the month? And what’s it going to mean for the employment report and the labor market, and all those things?

GOLDSTEIN: Well, the fact that there’s less productivity growth to offset costs means prices will go up a little bit faster. Not necessarily next month, but over the next few years. And therefore, this low inflation and low interest rate atmosphere that we’ve had for the last 10 years. We’re probably gonna get a little bit — not a lot, but probably a little bit — more on the inflation side, and perhaps therefore a little bit more on the interest rate side.

RYSSDAL: Ken Goldstein is an economist with

The Conference Board up in New York City. Mr. Goldstein, thanks a lot for your time.

GOLDSTEIN: Thank you.

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