A factory in South Carolina © Sam Fleming

Productivity is set to fall in the US for the first time in more than three decades, raising the prospect of persistent wage stagnation and the risk of a further populist backlash.

Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year.

The data highlight both the fragility of global economic prospects and pressures on blue-collar workers, who have rallied in large numbers to the anti-establishment message of Donald Trump, the Republican presidential candidate.

Janet Yellen, the Federal Reserve chair, has highlighted disappointing productivity numbers as one of the reasons for tepid wage growth in the US.

“Last year it looked like we were entering into a productivity crisis: now we are right in it,” said Bart van Ark, the Conference Board’s chief economist. “Companies really need to invest seriously in innovation. It is time for companies to move on the productivity agenda to turn this story around.”

Unless the rate of productivity growth increases, advanced economies will struggle to raise living standards and pay for the costs of their ageing populations.

The White House has argued that slowing investment may be dragging productivity down and has highlighted a slump in the number of business start-ups. Businesses have added 14.6m jobs over 74 straight months of job growth in the US, but the robust hiring has been coupled with insipid increases in output.

“Over time, sustained increases in productivity are necessary to support rising household incomes,” Ms Yellen said in a speech last year, calling for more investment, education, training and entrepreneurship to reverse the trend.


Drop in US gross domestic product per hour projected for this year

Output per person, an alternative measure of productivity, grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. A slowdown in Chinese productivity was a big driver, as was poorer output growth in commodity producing countries in Latin America and Africa because of weaker oil prices and production.

Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.

But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006.

Finance ministers from the Group of Seven industrialised countries this week repeated calls for structural reform to boost their economies. Other explanations for the productivity slowdown include regulatory barriers, the hangover of the Great Recession, a sluggish corporate rollout of innovations, and the mismeasurement of output from the digital economy.

If the Conference Board forecasts are borne out, 2016 will be the second year in a row that the eurozone sees stronger productivity growth than the US. Mr van Ark said the difference partly reflects a very sluggish labour market improvement in parts of the EU.

“You get an improvement in productivity growth because the recovery in output is ahead of the recovery in employment,” he said. He added that the slowdown reflects in part a transition from manufacturing to consumer services, which tend to show more sluggish productivity growth.

Output crisis has hit most leading economies

epa05238983 (FILE) A file photo dated 04 January 2016 showing a woman working on the production line of energy-saving lamps in a factory in Suining in southwest China's Sichuan province, China. China's industrial sector showed signs of expansion in March, after seven months of contraction, according to the Purchasing Managers' Index, PMI, published every month by the National Bureau of Statistics of China. The PMI rose to 50.2 points in March, up from February's 49 points. The indicator above 50 points marks the expansion of the manufacturing sector while the indicator below 50 reveals reduction in industrial activity. The National Bureau of Statistics also published 01 April 2016 the PMI of the service sector, which stood at 53.8 points after two months of a downward trend (53.5 points in January and 52.7 February). EPA/ZHONG MIN CHINA OUT
Electrical production line in China's Sichuan province © EPA

Productivity growth lies at the heart of economic progress. Without an improvement in output for every hour worked, economies can grow only if people work harder and longer or more people find jobs. A downturn in productivity growth in one year does not matter much because economies will go through ups and downs as technology changes, but a persistent decline is a much more serious prospect.

In advanced economies, the most recent peak in the productivity cycle came in the 1990s when computer technology displaced the typewriter and pools of secretaries. But the subsequent slide was masked by a surge in the efficiency of emerging markets, which threw off bad policies and marched to close the gap with the rich world.

More recently even emerging economies have struggled to maintain the growth rates of the early years of this millennium, leading to a slowing of global productivity growth, which started around a decade ago and is becoming ever more worrisome.

Different economies have focused on different problems — such as inequality in the US, the workings of the single currency in the eurozone and the UK’s relationship with the EU. But nevertheless the productivity crisis has infected almost all leading economies.

United States
Depressed productivity growth has provoked fraught debate among US policymakers as the country languishes in its shallowest economic recovery since the end of the second world war.

The poor productivity numbers are in some ways surprising given the breakneck pace of digital innovation in powerhouses such as Silicon Valley and other US research hubs.

However such new technologies are only gradually being rolled out across the economy. There are also difficulties measuring the fruits of the digital economy. Free online media and open-source software are, for example, hard to capture in GDP numbers.

Officials at the US Federal Reserve are busy discussing the policy implications. Some warned in April that inflation might rise more quickly than expected if productivity growth continued to disappoint even as hiring remains strong. That could force them to move more aggressively to lift interest rates.

US productivity

China experienced a sharp slowdown in growth of output per person to 3.3 per cent in 2015 from 5.2 per cent in 2014 — even as other big Asian countries, notably India, held up better. While Chinese productivity growth is forecast to recover marginally in 2016 to 3.6 per cent, the estimate remains far below the 7 per cent rate recorded between 2007 and 2013. The figures are also lower than official Chinese data because they are based on alternative output data devised by the Conference Board.

The steady slowdown comes as China attempts to grapple with overcapacity in a host of industrial sectors as well as debt-ridden zombie companies .

Emerging markets’ problems contrast with their breakneck growth earlier in the decade. One reason for their current difficulties has been declining commodity prices, which have taken a toll on output in resource-rich countries in Latin America and Africa, as well as Russia.

China productivity

Continental European economies have suffered more than most since the financial crisis of 2008-09, failing to recover much before sinking into the eurozone crisis in 2011-12.

While the eurozone was the fastest-growing large advanced economic area in the first quarter, prospects for productivity growth have weakened. Much of the focus in policymaking circles has been on restoring employment growth to bring down unemployment.

Before the crisis, output per hour worked tended to grow at an annual rate of 1.5 per cent across the eurozone from 1999 to 2006, below that of the US and UK, but a reasonable figure for mature and ageing societies. This average rate fell to 0.6 per cent a year between 2007 and 2013 and the more recent data show a further deceleration is likely.

Eurozone productivity

United Kingdom
Britain was the canary in the coal mine for labour productivity. Having enjoyed the fastest growth of advanced economies over long periods, output per hour effectively stopped rising in the UK at the start of the crisis.

At first, the “productivity problem” was thought to be caused by companies holding on to workers for fear of skill shortages when the recovery came. But in the upswing employment continued to rise sharply, reaching a record employment rate of those between 16 and 64 last year amid a disappointing recovery.

Now more often described as a “productivity crisis”, Britain’s output per hour worked fell to an average annual increase of only 0.2 per cent between 2007 and 2013 and after a false dawn in 2015, is expected to show zero growth this year.

The implication of successive downward revisions to productivity growth forecasts has been extremely weak rises in living standards and a doubling in the length of austerity.

UK productivity

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