DEEP DIVE: Productivity Is Making A Roaring Comeback

Our Roaring 2020s economic scenario is predicated on our assumption that chronic labor shortages, especially of skilled workers, will cause businesses to boost the productivity of the available labor force. Technological advances will enable the boost, and it should be a dramatic one. Accordingly, we expect a productivity growth boom during the current decade. It may well be that the boom started at the end of 2015, was interrupted by the pandemic, and now is progressing again. Indeed, last year’s productivity gains were impressive. This year is starting out with the promise of more gains to come.

Consider the following: 

(1) GDP math.

From a supply-side perspective, the math for the potential growth rate of real GDP is very simple. It is equal to the growth rate of the labor force plus the growth rate of productivity. To track the underlying trends in this relationship, Debbie and I monitor the yearly percent changes in the five-year average of real GDP, the civilian labor force, and productivity (Fig. 1 below). Over the past five years through Q4-2023, real GDP rose 2.1% at an annual rate with the labor force up only 0.6% and productivity rising 1.5%.