As to where it’s going from here, Cleveland Fed President Loretta Mester thinks it will revert to its post-WWII average of around 2¼ percent, shown by the horizontal gold line.
Yet Mr. Fischer noted that “productivity is extremely difficult to predict,” and only went as far as to say that it “will perhaps eventually return” to its earlier pace (italics ours).
But if things stay around where there are, we’re looking at 0.4% productivity growth plus 0.4% potential labor force growth, adding up to 0.8% longer-term real GDP growth.
Potential labor force growth is just about demographics. But if you dig into what’s driving this drop in productivity growth, you find something interesting.
This chart shows that there has been a steady fall in labor productivity growth and a noticeable shift in its sources of growth over the years.
But, eyeballing the previous chart, it looks like the post-World War II history of productivity growth has unfolded over several phases. So it’s instructive to break up the period judgmentally, starting with the initial 1948-73 period of relatively strong productivity growth, followed by a slump that lasted until the early 1990s, and so on, and ending with the period following the Great Recession and its immediate aftermath.
It is instructive to break out labor productivity growth into growth in labor composition (the quality of labor); capital intensity (the ratio of capital to hours worked); and multifactor productivity, a measure of the combined influences of technological change, higher efficiency, returns to scale, reallocation of resources, and other factors affecting economic growth, over and above the individual effects of capital and labor.
From 1948 to 1973, a period that saw labor productivity growth average almost 3% per year (first bar), multifactor productivity (red portion of bar) was the overwhelming driver of labor productivity growth, followed by capital intensity (green portion of bar).
The contribution of multifactor productivity then collapsed, causing labor productivity growth to fall by about half to 1½% per year between 1973 and 1995 (second and third bars), but then rebound between 1995 and 2007 (fourth and fifth bars), basically remaining robust until the eve of the Great Recession.