Worker productivity is regarded as one of the most important drivers of long-term economic performance. As we point out in Chapter 1 of our text, it is essentially just the total output of the economy divided by the number of hours worked, aided by investments in technology and capital. When productivity is booming, it allows the economy to expand faster without triggering inflation, writes The Wall Street Journal (Dec. 26, 2024). That has positive knock-on effects on all kinds of things, including the fiscal health of the federal government.
Total nonfarm business sector labor productivity increased 2.0% from a year earlier in the third quarter—the fifth straight quarter of growth at or above 2%. That is significant as the average rate of growth for the five years before the pandemic was 1.6%.
Jeff Schulze, at ClearBridge Investments, argues this productivity jump is thanks to some unique features of the postpandemic labor market. People have switched jobs, locations and even industries at a high rate, meaning workers are now better matched to their roles. “When you look on the horizon with all this investment in AI, it’s not hard to get too excited about a productivity boom that will move us up to 2.5% or even 3%,” he states.
To see what a big difference faster productivity could make if it is sustained, consider U.S. long-term debt projections based on estimates of total factor productivity (which takes into account the productivity of both labor and capital). The government sees federal debt held by the public rising from 99% of gross domestic product in 2024 to 116% in 2034. This assumes total factor productivity growth of just 1.1% per year. Raising this estimated productivity growth by half a percentage point would mean the debt-to-GDP ratio reaches a more manageable 108% of GDP by 2034.
Optimists argue that the U.S. could do much better. Yardeni Research is an advocate of a “roaring ’20s” scenario, which sees rapid growth this decade, driven in part by an AI productivity boom. Yardeni believes this could reach 3.5% in the second half of this decade. These past booms each had their own drivers: The interstate highway buildout and rapid suburbanization of the 1950s, mainframe computers and jet engines in the 1960s and, of course, PCs and the internet in the 1990s.
Classroom discussion questions:
- What are the 3 main drivers of productivity, according to the text?
- Why does productivity impact the national debt?