Productivity growth, in the long run, largely drives economic growth. It can also boost potential employment and spur greater investment. There are two widely cited measures of productiv- ity: labor productivity and total factor productivity.
The first measure is technically defined as the inflation- adjusted output per hour worked. TFP, on the other hand, incorporates multiple factors, including both labor and capital. It is sometimes called multifactor productivity. It’s calculated as a residual from total output and the factor inputs. Although we measure TFP indirectly, it is the variable that best captures what economists mean by productivity for the economy as a whole. In fact, it was Robert Solow’s pathbreaking research on economic growth that effectively created the concept of TFP. In growth models, this variable is often called “technology.” When economists examine structural trends in potential GDP, TFP is their preferred measure of productivity. The CBO, the Federal Reserve, and other policymakers use this measure when project- ing long-run economic growth (see chart) .
Looking at the data on both U.S. labor productivity and TFP shows why some economists are worried. Though labor produc- tivity and TFP are highly cyclical measures, they also exhibit long-term trends—and the growth in both series has been slowing for several decades. This decline is a major reason for the falling potential GDP. John Fernald, an economist with the Federal Reserve Bank of San Francisco, has constructed a utilization-adjusted TFP series for the United States, which shows a downshift in TFP growth in the early 1970s. But the story gets more interesting when we separate TFP into durables and nondurables. Productivity growth in the creation of durable goods has soared in the past several decades but has been stag- nant in nondurables.
Some economists have used these trends as a launch point into “techno-pessimism.”
Labor market implications
The rate of technological innovation obviously has major labor market effects. What is the relationship between new technological advances and the current skill distribution of the labor force?
Skill-biased technical change is the economic theory for how advances in technology can increase worker productivity, given compatible skills, but how they also displace certain work- ers. Think of the automation improvements in U.S. manufacturing. Total inflation-adjusted manufacturing production has never been higher than it is now, and manufacturing productivity, if anything, increased following World War II. But the total number of persons employed in manufacturing industries fell sharply, even more so as a percentage of the labor force (see chart). Driving these trends have been advances in machinery, supply chain management, and automation, among other efficiency improvements.
Cowen and the authors of Race Against the Machine fore- see skill-biased technical change as accelerating in the future. They see the fruits of this third industrial revolution—information technology—as having just begun to disrupt the labor market. This view is augmented by the recent research of David Autor, an MIT economist, who highlights a slightly different, and perhaps more disturbing, phenomenon: labor market polarization. Autor and his coauthors document the rise in demand for both high- and low-skill occupations alongside a decline in demand for middle-skill workers. They then tie technological automation to this erosion of middle-skill occupations. Manufacturing is one big area where these middle-skill jobs exist.
Low-skill jobs, like home health aides, janitors, and fast- food workers, tend to be classified in the domestic nontradable sector. In other words, these jobs are in service industries and the labor cannot be outsourced. At the other end, the high-skill jobs are increasingly defined by computer-compatible skills.
If the techno-optimists are correct about the future, the combination of skill-biased technical change and greater labor market polarization will complicate the already serious state of the U.S. labor market.
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