Robert D. McTeer, president and chief executive officer of the Federal Reserve Bank of Dallas, is optimistic that recent productivity growth rates are sustainable, and could go even higher. However, he says labor growth may be flatter in coming years.

McTeer is also member of the Federal Open Market Committee, the Federal Reserve Board's primary monetary policy-making body.

In a recent interview with the Dallas Morning News, McTeer explained that the rate of economic growth is determined by two factors: productivity increases -- more output for the same amount of inputs -- due to investment in new technology; and labor -- the number of hours worked -- which can increase if unemployment falls, workers extend their hours or a new pool of workers is found.

McTeer says productivity is growing due to new innovations that are coming together after years of investment. Thus, in recent years, U.S. productivy growth has returned to levels not seen since the 1960s:

• From 1996 through 1999, productivity growth has averaged 2.3 percent .

• This is double the 1.1 percent average productivity growth from 1973 to 1995 (see figure).
• Labor has also increased, at a rate of 2 percent from 1996 to 1999, as unemployment fell and welfare recipients have gone to work.

• As a result, the economy has been growing by about 4.5 percent a year.

However, labor growth is limited to the increase in the workforce or hours worked -- about 1 percent a year. In the long-run, says McTeer, productivity growth is the key to rising living standards.

Source: Scott Burns, "Economics 101 with Robert McTeer," Dallas Morning News, October 17, 1999.

For more on Current and Future Economic Growth http://www.ncpa.org/pd/economy/econ4.html