Workforce + Productivity = Growth?
July 16, 1997
Most economists subscribe to the theory that the rate of economic growth is determined by adding together growth in the workforce and average growth in productivity per worker.
Although the theory sounds reasonable, that is not what occurred in two recent periods -- 1983 to 1989, and 1992 to 1996. In both periods, economic growth was higher than the sum of the two variables.
- In the earlier period, while economic growth was averaging 3.9 percent annually, productivity was growing only 1.57 percent and the labor force increasing 1.58 percent on a yearly average -- for a total of only 3.15 percent.
- In the most recent period, economic growth averaged 2.58, even though productivity increased only 1.04 percent and the workforce grew an average of 0.9 percent -- totaling just 1.94 percent.
- That leaves 0.75 percent of growth unaccounted for in the earlier period and 0.64 searching for a rationale in the most recent period.
- While both figures would appear small, the 0.75 percent figure represents $60 billion a year in output, with the 0.64 percent amounting to about $48 billion.
So why aren't the figures matching up?
A number of economists are coming to the conclusion that the two variables, alone, don't tell the whole story. Factors such as reduced government intervention, lower tax rates, more efficient production cycles and several other factors -- if added in -- would explain the seeming anomaly.
So if a little bit of deregulation and modest tax cuts lead to such substantial gains, wouldn't a healthy dose of both make every day look like an economic Fourth of July?
Source: Perspective, "Speed Limit 2.5 Percent?" Investor's Business Daily, July 16, 1997.
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