NCPA - National Center for Policy Analysis

Productivity Boom

May 12, 2004

Due to productivity increases, modern economies are able to produce significantly more goods and services for less work effort. The result is rising standards of living, according to Federal Reserve Bank of Dallas economists W. Michael Cox and Richard Alm.

  • Since 1995, output per hour in the United States has surged an average of 3.2 percent a year, more than double the rate of the previous 22 years.
  • Productivity jumped 14 percent in the three years since the last employment peak in 1999 -- better than any of the seven major recessions and recoveries since World War II.

Technological innovation and trade are two drivers of increasing productivity; however, some countries do not allow markets to adjust to take advantage of potential efficiency gains. This is particularly true with respect to labor markets:

  • The United States has the world's freest labor market, according to the World Competitiveness Report and Forbes magazine ratings.
  • In Europe, however, it is difficult to dismiss workers, so companies are reluctant to hire them in the first place -- resulting in high unemployment and slow job growth.
  • Interference in labor markets may be even more costly in Latin America, where most nations impede reorganization of the economy by favoring entrenched interests.

Increasing productivity over the long-run requires massive reorganization of work. For example, 90 percent of Americans worked on farms two centuries ago, whereas just 2 percent do today.

Source: W. Michael Cox and Richard Alm, "Productivity Boom's Wrenching Changes Should Be Embraced," Investor's Business Daily, May 12, 2004; adapted from "A Better Way: Productivity and Reorganization in the American Economy," Federal Reserve Bank of Dallas Annual Report for 2003, forthcoming.

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