Negative Productivity Trends

Gonna pack my lunch in the morning
And go to work each day
And when the evening rolls around
I'll go home and lay my body down
And when the morning light comes streaming in
I'll get up and do it again
--Jackson Browne

These pages have observed downtrends in productivity growth--particularly over the past ten years. After the Q3 number printed at -0.3% earlier this week, people are once again wondering what is going on.

Let's look at the productivity series. Below we see the annual percentage change in productivity (i.e., output per hour worked) in 'non-farm business' (i.e., manufacturing and service sectors excluding agriculture).

Ignoring measurement challenges (e.g., how to accurately capture all hours worked?), it is clear that productivity has been declining over time--with perhaps some pushback inspired by the productivity-boosting info tech movement in the late 20th century. Although I don't have statistical capability right this moment, I would bet that a linear regression model fitted to these data would find a negative and significant slope.

What is grabbing people's attention is that the variation that accompanies the data points in this downtrend is beginning to touch, or cross zero with increasing regularity.

What is driving the decline? While many theories are being advanced, it seems to me that the central cause is this: dwindling savings.

To improve productivity, humans need tools that they can combine with labor to produce more output per hour. In order for some people to produce those tools, however, they must forego producing food, clothing, and other vital resources necessary for their own survival. The toolmakers live off of resources that others have set aside (i.e., savings).

Savings that fund tool production are often referred to as capital. When people save less and consume more, there is less capital. Less capital means less tool production. Less tool production means lower propensity for productivity improvement.

When people consume everything they make and dip into past savings to fund their immediate lifestyles, then they are engaging in capital consumption. When government debt is factored into the mix, savings rates in the US have been increasingly negative for some time.

Negative savings rates are driving productivity decline--a decline which will surely compromise standard of living if it continues to persist.