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The Productivity Mystery Continues

August 15, 2022 | Posted in: Insights, Investing

I have written many times about weak productivity growth which is of great concern because overall economic growth is equal to the sum of population and productivity growth. Productivity growth is defined as changes in the amount of output for each hour worked. Productivity grew at roughly a 3% annual rate from 1980 to 2010, but it has hobbled along since then at a 1.2% annual rate. Well, the latest news is that productivity in the second quarter fell 2.5% from the prior year, the steepest decline since 1948 when the Labor Department began tracking it. Productivity growth is also related to inflation in that enhanced productivity reduces the impact on inflation of rising wages. Unfortunately, the combination of upward wage pressure and declines in productivity resulted in a 10.8% annualized increase in unit labor costs in the quarter following a 12.7% rate in the first quarter.

Most economists are mystified by the poor growth in productivity. After all, recent decades have witnessed the investment of massive sums on automation, the employment of computers in virtually every field, the growth in artificial intelligence, the proliferation of robots, and so on. All of these should be enhancing productivity. One explanation, which I find plausible, is that we aren’t measuring output correctly. Specifically, it is difficult to measure the impact of brand power, intellectual property, and other intangibles that now dominate our economy.