NCPA - National Center for Policy Analysis


December 16, 2008

The economic attention of U.S. government and business leaders is fixed squarely on the downturn and financial crisis.  Whether or not bailouts are proper short-term medicine, economists agree that the long-run solution for restoring economic growth lies in raising productivity. 

So how has U.S. productivity grown recently, asks Martin Baily, who served as the chairman of the Council of Economic Advisers for President Clinton, and Matthew Slaughter, associate dean at the Tuck School of Business at Dartmouth.  Unfortunately, very slowly:

  • After averaging 2.7 percent productivity growth from 1995 through 2002, annual growth of productivity in the nonfarming business sector has slowed dramatically -- to just 1.7 percent in 2005, 1.0 percent in 2006 and 1.4 percent in 2007.
  • At this new average rate of under 1.4 percent, it would take nearly 52 years for average U.S. living standards to double -- versus just 26 years at the earlier average.
  • Signs of this slowdown are apparent, particularly in the waning competitiveness of U.S. sectors like automobiles, financial services and information technology.

However, it's important to acknowledge that dynamic product markets create dynamic labor markets as well, says Baily and Slaughter:

  • In recent years, government statistics show that about 25,000 jobs are destroyed and created every hour that America is open for business.
  • But this presents very real challenges to workers; today's U.S. labor market programs are well intentioned but because of their design, prove inadequate under current labor market pressures.
  • Unemployment insurance was introduced in the early 1930s and has not changed in any fundamental way since.

Therefore, we should support fundamentally reshaping programs like unemployment insurance with a set of expanded and integrated policies that would include wage-loss insurance, health insurance coverage while unemployed and expanded eligibility and incentives for retraining and skills development, say Baily and Slaughter.

Source: Martin Neil Baily and Matthew J. Slaughter, "What's Behind the Recent Productivity Slowdown," Wall Street Journal, December 13, 2008.

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