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Can Productivity Keep Driving the U.S. Economy?

Productivity of U.S. workers increased by 2.7% in 2023 — well above the average annual rate of 2.1% since the end of World War II, and a dramatic change from 2022, when productivity dropped by 2.0%. It’s also a big improvement over the 0.9% growth rate in 2021.1

According to the nonpartisan Congressional Research Service,  “Productivity growth is a primary driver of long-term economic growth and improvements in living standards.”2 On  a more immediate level, the productivity surge in 2023 may help explain why the U.S. economy was able to grow at a strong pace while inflation dropped.

Doing more with less

Broadly, productivity is the ratio of output to inputs. A productivity increase means that output increases faster than inputs, essentially producing more with less.

The most commonly cited productivity measure for the U.S. economy is labor productivity for the nonfarm business sector (the data cited in the first paragraph of this report). In simple terms, this is the value of goods and services produced per hour of labor. The nonfarm business sector comprises most U.S. business activity excluding farms, general government, and nonprofits.

Boosting GDP while fighting inflation

The 2.7% increase in 2023 means that, on average, 2.7% more value was created for each hour of labor. This helps boost gross domestic product (GDP), while also helping to control inflation by holding back the wage-price spiral, which can push inflation out of control.

In a tight employment market, as we have had for some time, a shortage of workers can force businesses to offer higher wages, which they pass on to consumers as higher prices. Because consumers are then earning more at their jobs, they demand more goods and services and are willing to pay higher prices, which pushes businesses to hire more workers at higher wages, continuing the cycle. Increased productivity allows business to keep prices lower even as they pay workers more. This seems to have occurred in 2023, with average hourly wages rising by 4.3%, while inflation dropped to 3.4% — the first time since the pandemic that wages increased faster than inflation.3

Why is productivity increasing and can it be sustained?

Increases in labor productivity are typically driven by  improved tools and technology, more efficient processes and organizations, and increased worker experience, education, and training. The proliferation of computers in the workplace spurred a productivity surge in the 1990s, and some analysts point to artificial intelligence (AI) as contributing to the 2023 increase. It’s possible that AI has already improved some businesses, but any large-scale impact may take years, as businesses integrate AI through worker training and new processes. As this unfolds, AI could help drive a long-term productivity surge.

A more immediate explanation for the current increase may be adjustment and experience with the hybrid work model. A recent survey found that 43% of remote workers felt working from home makes them more productive, while only 14% believed it makes them less productive. (Another 43% said it makes no difference.)5 The ideal situation would allow employees to work in the most productive environment. Three years after the pandemic, businesses may be improving that balance, and it’s possible that further developments in hybrid work could continue to drive productivity gains for some time.

Going Forward

Productivity increases can produce benefits across our society from wage increases to lower rates of inflation.  Artificial Intelligence and new technologies may allow us to become more productive over time and while this intelligence may replace certain jobs, overall, it could be a net benefit for our society.  Countries and governments should take time to understand the importance of employee productivity so that they are able to compete globally and allow their country to thrive.

CRA Investment Committee

Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joseph McCaffrey, CFP®
Phillip Tompkins, CFP®

(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)

1, 3–4) U.S. Bureau of Labor Statistics, 2024
2) Congressional Research Service, January 3, 2023
5) Bloomberg, January 30, 2024

 

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