United States: Productivity could be boosted by cyclical factors

Macro Highlights - 7/19/2017

Key Takeaways of the week with Lisa Turk, United States Economist


 

Productivity could be boosted by cyclical factors

  • While labour productivity growth fell by about 1% between 2000 and 2010, we expect it to pick up again from 1.2%, on average between 2010-2015, to 1.6% between 2016-2021

  • It should be stimulated by certain cyclical factors such as increased investment in information and communication technology, higher R&D spending and an infrastructure plan

  • In contrast, some structural factors, such as the ageing population or the growing skills mismatch, could continue to weigh down on productivity growth


Even though innovations in robotics, automation, artificial intelligence or connected objects have been developing exponentially for several years now, the growth of labour productivity has slowed down in the United States. Labour productivity measures output (GDP) per unit of labour force employed, represented here by the number of employees. This weakening of productivity growth began before the financial crisis, falling from 3.0% in 1999 to 0.4% in 2012, and to 0.9% in 2014.

According to the IMF[1], the factors expected to impact productivity growth over the next few years are primarily investment in information and communication technology (ICT), skills allocation, spending on Research and Development (R&D), the ageing population, migratory policies, capital expenditure and regulations. The following three factors appear to be of particular importance in this list:

  • Skills allocation is a critical factor because a growing mismatch between the supply and demand of skills is visible in the US labour market, representing a drag on productivity.
  • Investment in ICT could play a major role in the medium term and an increase in it could enable technical progress to be spread more widely through the economy.
  • Finally, the measures to be implemented by the Trump administration could have considerable impact on productivity: positive in the case of an infrastructure-based plan or negative in the case of an excessively harsh migratory policy, for instance.

 

In the medium term, although structural factors could continue to weigh on productivity - improvements at the cyclical level - could, according to our calculations, enable productivity to pick up by an average of about 0.4 percentage points in the medium term. As such, we anticipate that more substantial investments in ICT, an increase in R&D expenses and the implementation of an infrastructure plan could stimulate productivity. [...]

 

[1] G. Adler et al., Gone with the Headwinds: Global Productivity, IMF, April 2017. E.Dabla-Norris et al., The New Normal: A sector-level perspective on productivity trends in advanced economies, March 2015, http://www.imf.org/external/pubs/ft/sdn/2015/sdn1503.pdf


 

Lisa Turk, United States Economist