“Usable

Productivity”

Growth

the

United

States

International

Comparison,

1980

‐

2005

Dean

Baker

and

David

Rosnick

June 2007

Center

for

Economic

and

Policy

Research

1611

Connecticut

Avenue,

NW,

Suite

400

Washington,

D.C.

20009

202

‐

293

‐

5380

www.cepr.net

“Usable Productivity” Growth in the United States

•

Contents

Executive Summary.............................................................................................................................1

Introduction..........................................................................................................................................2

Deriving “Usable” Productivity.........................................................................................................4

1. Gross and Net Productivity..............................................................................................................4

2. Output and Consumption Deflators.................................................................................................4

3. Changes in the Current Account Deficit...........................................................................................5

4. Changes in the Net Investment Share of Output...............................................................................6

Productivity Growth in the OECD 1980-1995...............................................................................7

Productivity Growth in the OECD 1995-2005.............................................................................11

Conclusion..........................................................................................................................................15

Appendix.............................................................................................................................................16

About the Author

Dean Baker is a co-director and David Rosnick is a research associate at the Center forEconomic and Policy Research.

Acknowledgements

John Schmitt and Rebecca Ray gave helpful comments and edits to earlier drafts.

Center for Economic and Policy Research, June 2007

•

Executive

Summary

Economists attach enormous importance to productivity growth because it is the main long-rundeterminant of living standards. In an economy with rapidly rising productivity growth, thepopulation can experience rapid increases in income, or leisure time, or some combination of thetwo. If the benefits of productivity growth are broadly shared, then the whole society can benefit.By the most commonly used measures of productivity, the U.S. economy has performed better thanmost other wealthy economies over the last decade. It had a sharp upturn in productivity growth in1995 associated with the IT revolution, which was not matched in other countries. As a result, theUnited States gained ground on most countries during the decade from 1995 to 2005.However, productivity growth cannot be directly translated into improvements in living standards. This paper makes two technical adjustments to measured productivity growth to assess the rate at which the economy is allowing for rises in living standards. It uses a net measure of output(removing changes in the share of output that go to replace depreciated capital) and it uses aconsumption deflator instead of an output deflator to assess the rate at which the economy canprovide for increases in living standards. When these two adjustments are made to measured productivity growth in the United States andother wealthy countries, the performance of the United States looks relatively worse in both theperiod from 1980 to 1995 and also in the period from 1995 to 2005. In fact, these adjustments makethe rate of “usable productivity” growth slightly slower in the United States than in other wealthy countries over the period from 1995 to 2005. The paper also attempts to assess the extent to which productivity gains during these periods aresustainable. The sharp rise in the U.S. current account deficit over the years from 1995 to 2005allowed both consumers and producers to take advantage of lower cost imports. This can have theeffect of increasing “usable productivity” both by lowering consumer prices and also by making low-cost materials and equipment available to producers, which can be substituted for labor. However,the current account deficit cannot grow indefinitely as a share of GDP. This paper adjusts for theeffect of the growth of the current account deficit on usable productivity, to come up with ameasure of sustainable usable productivity – the rate of usable productivity growth that would havebeen possible if the current account deficit had stayed constant as a share of GDP. It makes asimilar adjustment for changes in net investment. With these adjustments, the U.S. economy had a sustainable rate of usable productivity growth overthe period from 1995 to 2005 that was 0.4 percentage points lower than in the average of otherOECD countries. These calculations suggest that even with the 1995 productivity upturn, theUnited States is still not able to sustain the same rate of increase in living standards as other wealthy countries. This fact has been partly concealed by the large rise in the current account deficit anddecline in net investment over the last decade. However, when the current account deficit stabilizesor shrinks in the years ahead, the rate of increase in living standards in the United States is likely tobe slower than in other wealthy countries, as was clearly the case between 1980 and 1995.