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2003 Annual Report—Federal Reserve Bank of Dallas

A Better Way
Productivity and Reorganization in the American Economy

Riding a Surge of Technology

Because productivity determines how well we live, Americans want to know how they're doing.

In an economy as large and diverse as ours, it's a Herculean task to calculate a productivity number that sums up the efforts of 130 million workers, employed in millions of establishments that produce more than $11 trillion in output. The Bureau of Labor Statistics does the best it can in producing quarterly estimates of output per hour, derived largely from surveys of businesses.

BLS data show that U.S. productivity has grown steadily over the long haul, with output per hour rising an average 2.3 percent annually since 1870. A few percentage points a year might not sound like much, but this historical rate doubles per capita income every three decades or so. (See Exhibit 2.)

The Internet and other innovations have helped ignite a surge in U.S. productivity since the mid-1990s. In the current economic recovery, companies are continuing to see gains from investments in new technologies.

The productivity path has been choppy due to business-cycle upturns and slowdowns as well as longer-term economic trends. From 1950 to 1973, for example, output per hour rose a healthy 2.7 percent annually. Over the next 22 years, productivity sank below its long-term trend, rising just 1.5 percent a year. The slowdown remains something of a mystery, although some economists suggest that early investments in computers and information technology didn't provide a big enough payoff.

Productivity broke out of its two-decade doldrums in the mid-1990s as computers, scanners, the Internet and other innovations finally reached critical mass in America's workplaces. Average annual productivity gains have surged at 3.2 percent since 1995.

The revival shows every sign of continuing. The economy emerged from the 2001 recession with productivity growth well above the average of the seven significant business cycles since 1960. In the first 11 quarters after employment peaked, productivity jumped 13 percent, compared with the historical norm of 8 percent. In another break with the past, the gains spread beyond manufacturing, the traditional productivity leader, and into the whole economy, including retailing and services.

Future productivity gains are likely to come from breakthroughs in biotechnology, a field just now tapping the possibilities opened by decoding the human genome.

Productivity's postrecession surge has been strong enough to spark controversy. The labor market has languished, with no net job creation two years into the recovery. Some see productivity as a millstone that allows companies to expand without hiring more workers. But viewing productivity as a drag on employment is myopic. Americans don't face a choice between having work and working a better way. Higher productivity raises incomes and profits, which fuels demand, boosts investment and puts more people to work, usually at new jobs.

We could dismantle our factory robots and farm equipment with the idea of hiring lots of busy hands to build cars and till the soil. We could junk our backhoes and dig ditches with shovels. Doing so would be absurd. We'd immediately see that renouncing productivity would do us great harm. Prices would be higher, wages lower and the economy smaller. Work would be harder. Living standards would be dragged backward in time, sacrificed to the false god of more jobs.

Rather than shunning productivity, we should embrace it and move forward. As the economic recovery continues, the United States may not be able to sustain the same pace of productivity growth it has the past two years. Even with a slowdown, the nation will likely build on recent years' strong productivity growth, rather than relapse into the post-1973 slump.

The bullish case for future productivity centers on the technologies that have made U.S. workplaces more efficient in recent years. The microchip revolution still has plenty of kick left in it. And as world markets integrate, we should add to our productivity gains from trade.

Further out, new generations of world-shaking technologies will impact the way we work. Take nanotechnology, the science of rearranging atoms and molecules. It promises to create new materials that are stronger, lighter and more flexible and substances with perfect insulating, lubricating and conducting properties. Biotechnology will emerge, too, as a potent force for progress.

When combined with America's entrepreneurial bent and open markets, the inventory of cutting-edge technologies should deliver rapid productivity growth for years. Healthy gains in output per hour may restore the luster of the New Economy, a concept tarnished by the dot-com implosion. The New Economy carries a powerful policy implication: With stronger productivity, the economy can grow faster without fueling inflation.

Exhibit 2

Productivity by the Numbers

After Picking Up in Recent Years . . .
The U.S. economy has achieved steady increases in productivity over the past five decades (below). A surge since 1995 has not only reversed a 22-year slowdown but also eclipsed the historical trend of 2.3 percent a year.

. . . Productivity Really Takes Off
Productivity growth has been especially strong in the most recent business cycle (below). In the 11 quarters since the high point for employment, output per hour has increased faster than in any of the seven major recessions and recoveries that preceded it.

Productivity index, peak quarter of employment = 100

	1979–80	1981–82	1983–90	1991	1992–2000	2001–03

Jobs, Productivity Go Together
The causes of job losses include greater efficiency, rising import competition and other factors that spur reorganization in the economy. The number of workers filing initial claims for unemployment insurance shows layoffs are a routine part of economic life, whether employment is rising or falling (shaded).
Monthly Average Initial Claims	436,000	519,000	366,000	448,000	338,000	404,000
Except for brief recessions and their aftermath, the economy creates enough new opportunities for both those who've lost jobs and new entrants to the labor force, increasing total employment and lowering the unemployment rate.
Monthly Average Net Job Gain	94,000	–91,000	212,000	–71,000	224,000	–67,000
End-of-Period Employment (in thousands)	90,936	88,756	109,118	108,261	132,441	130,043
Annual Average Unemployment Rate	6.6%	9.7%	6.5%	7.3%	5.3%	5.8%
This reorganization, combined with efficiency gains in the workplace, forges a more productive economy with more jobs. Output per hour rose 67 percent in the past quarter century. At the same time, the United States added almost 40 million workers to the employment rolls.
End-of-Period Productivity*	100	102	119	123	148	167
*Index, fourth quarter 1979 = 100


With ATMs, electronic fund transfers and the Internet, banks can handle more transactions using fewer tellers and support staff. Output per hour in commercial banking has nearly doubled since 1970.	Electronic telephone switches have taken over much of the nation's long-distance and toll-call traffic. Calls per operator rose from 17 a day in 1950 to 2,072 in 2002.	More efficient blast furnaces, computerized controls and shorter downtimes are helping America's steel mills compete. Tons per U.S. steel worker increased from 97.8 in 1950 to 314.8 in 2002.
At auto assembly plants, computers and robots now handle welding and many other tasks once done by hand. Although today's cars are vastly more complex, annual production per employee increased from 9.8 vehicles in 1950 to 13.5 in 2002.

Better machinery, fertilizers, irrigation and high-yield seeds have made farms more productive. Corn output rose from 38 bushels per acre in 1950 to 142 in 2003, rice from 2,371 to 6,645 pounds, and potatoes from 15,300 to 36,700 pounds.

Technology makes electric power plants more efficient. Kilowatt-hours per ton of coal rose from 1,682 in 1950 to 1,955 in 2002; per barrel of oil, from 447 to 573; and per 1,000 cubic feet of natural gas, from 71 to 113.

Productivity Powers Progress

Increasing productivity holds the key to higher living standards. The U.S. economy hasn't seen big changes in the unemployment rate (1), labor force participation rate (2) or consumption as a share of income (3). Productivity (4) stands out as the prime force behind economic progress. Most of the productivity gains taken as time off the job occurred before 1980 (5). Today, we're taking most of the benefits of productivity in higher consumption (6) and unmeasured gains in living standards.