A key factor in slow GDP growth

Gene Epstein‘s latest “Economic Beat” column in Barron’s explores causes of sluggish growth in American gross domestic product.

When it comes to economic growth, labor productivity isn’t everything—it’s close to being the only thing, to steal a phrase attributed to Vince Lombardi.

Labor-productivity growth is also a key driver of workers’ income gains. Given the snail’s pace of its increase, it has recently been doing a relatively poor job on both counts.

Labor productivity compares the quantity of goods and services produced with the total labor hours employed to turn them out. Technically stated as real output per worker-hour, it increases when output rises faster than total labor hours.

So if, say, real output is rising by 2.5% and total hours worked by 1%, labor productivity is climbing by the difference: 1.5%. Applying this example, we might say that, even if labor productivity is flat and thus growing at a zero pace, the 1% increase in hours worked will still bring a 1% growth of output.

That’s true, and as I have noted, there are at least 1.3 million prime-age men who might join the labor force and boost the number of hours worked, boosting output (“July Jobs Report: ‘Excellent’ or Mediocre?” Aug. 5). But a 1% rise in output due to a 1% increase in hours worked does nothing to boost the all-important hourly wage. For that to occur, output per worker-hour must rise.

Over the long run, because more hours worked require more workers, a gain is usually accompanied by an increase in the population. So, if a 1% boost in output due to an increase in hours is offset by a 1% population rise, output per capita doesn’t increase at all. The only way to avoid this standoff is for output per worker-hour, or labor productivity, to keep climbing.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...

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