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No Growth Without Labor Productivity

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Last week the Bureau of Labor Statistics handed down some pretty dismal news for American manufacturing—news that was largely overshadowed by the façade of job growth numbers. Yes, American manufacturing is adding jobs. But our labor productivity numbers have fallen.

Labor productivity is simply how many goods can be produced with an hour of work and matters because along with the size of the labor pool, it determines the overall output of an economy. Factors such as technology and capital investment let workers produce more than they could on their own. In the first quarter of 2015, the number of American hours worked (a proxy for the number of workers) grew at a 1.5 percent annual rate. However, the real value of the goods America produced declined at a 1.6 percent annual rate over the same period. And that’s very dangerous, especially because that decline extends to the manufacturing sector.

Manufacturing labor productivity is actually down by 1 percent in the first quarter. And, while the first quarter findings may be the result of a measurement issue, multi-year trends show labor productivity growth much slower than our competitors. In the last two years, annual manufacturing labor productivity growth has averaged a mere 1.7 percent annual growth rate, down from 2.5 percent annual growth from 2010 to 2013. That rate fell well behind other nations competing against the United States in high-tech industries. From 2010 to 2013, the European Union averaged 4.1 percent average annual labor productivity growth, Korea averaged over 5 percent annual growth, and China over 8 percent annual average growth in manufacturing labor productivity.

Stagnant labor productivity growth implies that the United States is failing to adopt technology fast enough and may be replacing manufacturing technology with cheap labor, reducing the amount of goods being produced per worker.

Even more troubling is that this quarter’s labor productivity decline was concentrated in durable manufacturing, which contracted at a 3.3 percent annual rate in the first quarter. Durable manufacturing has been the predominate force behind the steady U.S. recovery (72 percent of jobs gained between 2010 and 2013 were in either automotive manufacturing or in metals). These goods are also more likely to be traded internationally. Slacking productivity in these industries implies that the U.S. manufacturing jobs recovery is largely based on companies substituting cheap labor for investment in automation and other new technologies.

Most optimists look at the increasing use of advanced technology and automation in U.S. factories as proof that the United States remains competitive in advanced industries. However, many other nations adopted and implemented these technologies much faster than we did over the last few years. America’s advantage in advanced industries is becoming increasingly fragile, and we stand to lose out in these high-wage and high-growth fields, such as additive manufacturing and advanced semiconductors, and not just in the low value-added industries we mentally associate with offshoring. Without real productivity growth, the United States’ existing $83 billion trade deficit in advanced technology goods could increase.

Advocates have warned for years that the United States’ weakening commitment to public R&D spending was eventually going to come home to roost. Economists agree that the only way to achieve real, sustainable growth is through technology. Unfortunately, investment in R&D by the federal government is declining. Decreased technological progress will continue to slow the U.S. economy. Without labor productivity growth, expect to see the United States’ trade deficit get even wider and for our manufacturing job growth numbers to dwindle.

How can the United States stave off this scenario and increase its manufacturing labor productivity? We must take real steps to achieve more than superficial, if crowd-pleasing, job growth statistics. We need actual growth in our ability to compete in the most advanced industries. That means facilitating higher levels of R&D, corporate tax reform, and high-skilled immigration reform aimed at letting IT workers and engineers into the country. We also should enact policies that encourage the adoption of new technologies in our workforce. With these reforms, the United States would have a chance to make up ground and remain competitive internationally in the global race for innovation.

 

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About the author

Adams Nager is an economic policy analyst at ITIF. He researches and writes on innovation economics, manufacturing policy, and the importance of STEM education and high-skilled immigration. Nager holds an M.A. in political economy and public policy and a B.A. in economics, both from Washington University in St. Louis.