U.S. Productivity Growth

Robert J. Gordon,Northwestern University and NBER,NABE 48thAnnual Meeting,NBER Session,Copley Place Marriott, Boston, September 11, 2006The U. S. Productivity Growth “Explosion”:Dimensions, Causes, Consequences, AftermathBrief Survey of NBERResearch on Macro Productivity IssuesResearch Papers on my web site, google “Robert J. Gordon”Topic #1 on quarterly productivity behavior, today’s unpublished update of BPEA 2003Topic #2 on inflation, unpublished update of BPEA 2005 with added dire implications for BernankeTopic #3 on Europe, new paper on web site (unfortunately no time to talk about this)Broad-rangingInterpretation of U. S. 2002-04 Productivity “Explosion”#1. Causes, Were they Temporary, Dimensions of Future Slowdown#2. Effects of Productivity Growth on Core Inflation and the Fed’s DilemmaFor this NABE Audience the quarterly analysis of U. S. data will be emphasizedLots of charts, new analysis here done since early August BEA and BLS data releasesTopic #1: Behavior of Productivity Growth in Quarterly DataImportant to understand the dynamicsThey have nothing to do with the NBER business cycle chronologyThe behavior of productivity is driven by the lag of hours behind outputThis was a topic of the early 1960s, Okun’s Law and Walter Oi on labor as a “quasi-fixed factor”8-quarter Change in NFPB Output and Hours, 1955-2006-4-202468101955:011956:021957:031958:041960:011961:021962:031963:041965:011966:021967:031968:041970:011971:021972:031973:041975:011976:021977:031978:041980:011981:021982:031983:041985:011986:021987:031988:041990:011991:021992:031993:041995:011996:021997:031998:042000:012001:022002:032003:042005:012006:02HoursOutput NFPBKey Implications of Lagin Hours Behind OutputProductivity Growth is not Synchronized with the utilization of resourcesBecause hours lags, productivity leadsProductivity Growth is fastest at the beginning of the recoveryThe “early recovery productivity bubble”Notice the “Early Recovery Bubble”,8-qtr changes 1955-2006 -4-202468101955:011956:021957:031958:041960:011961:021962:031963:041965:011966:021967:031968:041970:011971:021972:031973:041975:011976:021977:031978:041980:011981:021982:031983:041985:011986:021987:031988:041990:011991:021992:031993:041995:011996:021997:031998:042000:012001:022002:032003:042005:012006:02Output per hourOutput NFPBTrend MethodologyTwo Leading Methods of DetrendingHodrick-Prescott Filter–Normal Paramater of 1600 bends too much and allows too much of the “cycle”to get into the trend.–Everything here uses HP 6400Kalman Filter. Allows correcting for changes in the business cycleAlternative U. S. NFPB Productivity Trends in Quarterly Data, 1954-200600.511.522.533.51954:011956:041959:031962:021965:011967:041970:031973:021976:011978:041981:031984:021987:011989:041992:031995:021998:012000:042003:03H-P 6,400Kalman filter with gap termKalman filter without gap term8-quarter Actual LPvs. the Average Trend-2-101234561955:011959:031964:011968:031973:011977:031982:011986:031991:011995:032000:012004:03PercentActual LPTrend LPThe Early Recovery Bubble,How Much “Payback”is Left?2001:3-2004:2, 11 quarter AAGR–Actual 3.87–Trend 2.92–Difference 0.95, or cumulatively 2.622004:2-2006:2, 8 quarter average–Actual 2.00–Trend 2.68–Difference -0.68, or cumulatively -1.37What Implications for2006:Q2-2008:Q2?Start by Assuming that the trend slows a bit further from 2.68 to 2.50Remaining “payback”of 2.62 (01-04) minus 1.37 (04-06) equals 1.25Distributing that over next two years implies actual AAGR = 1.88Anything below that would imply the trend is lower than 2.50The “Output Identity”Organizational Tool forTrends, Cycles, and ResidualsIn its Simplest Form Makes Output (Q) Equal to the product of:–Productivity (Q/A)–Hours per Employee (A/E)–Employment Rate (E/L), that’s just (1 –U/L)–Labor-force Participation Rate(L/N)–Working-age Population (N)Hiding Inside the Output Identity are Numerous Useful Trend and Cyclical Relationships, including OKUN’s Law.Five-term Output Identity Cannot be Used for Empirical AnalysisProductivity data for the NFPB sectorExpand the identity to identify NFPB variables and links to total economy:Mix effect –ratio of output per employee: total/NFPB sectorEmployment ratio of payroll to householdEEEQEQNNLLEEAAQQPBBPBBBB//.The Novelty hereis to Display the Seven ComponentsWe’ll look through each of them, plotting actuals (8-qtr MAs) vs. trendsWe’ll pay special attention to what has happened to each over the past six yearsThen we’ll multiply them together to see what has happened to potential real GDP growthActual vs. Trend Growthfor Hours per Employee-2-1.5-1-0.500.511.51955:011959:031964:011968:031973:011977:031982:011986:031991:011995:032000:012004:03PercentActual AETrend AEActual vs. Trend Growthfor Labor Force Participation-1.5-1-0.500.511.521955:011959:031964:011968:031973:011977:031982:011986:031991:011995:032000:012004:03PercentActual LNTrend LNActual vs. Trend Growthfor the Employment rate-2.5-2-1.5-1-0.500.511.521955:011957:031960:011962:031965:011967:031970:011972:031975:011977:031980:011982:031985:011987:031990:011992:031995:011997:032000:012002:032005:01 Actual E/L Trend E/LActual vs. Trend Growthfor Wkg-Age Population00.511.522.51955:011959:031964:011968:031973:011977:031982:011986:031991:011995:032000:012004:03PercentActual NTrend NActual vs. Trend Growthfor the “Mix Effect”-2-1.5-1-0.500.511.51955:011959:031964:011968:031973:011977:031982:011986:031991:011995:032000:012004:03PercentActual MixTrend MixActual vs. Trend Growthfor Payroll vs. Household Employment-1.5-1-0.500.511.522.51955:011959:031964:011968:031973:011977:031982:011986:031991:011995:032000:012004:03PercentActual EPETrend EPETwo Measures of TrendPotential GDP Growth-2-10123456781955:011957:031960:011962:031965:011967:031970:011972:031975:011977:031980:011982:031985:011987:031990:011992:031995:011997:032000:012002:032005:01Actual OutputAlternative Trend OutputTrend OutputPotential GDP vs. Productivity: the Trend Story in Table 2Potential GDP growth (Δq*) ranged from: –4.03 in 1963-72 to 2.69 in 1987-94–Differences accounted for byProductivity (peak 1954-63)Population growth (peak 1972-78)LFPR (peak 1972-78)–Offset by hours/employee (peak 1963-72)Currently growth rate is 2.9 percent by one measure and 3.0 percent by the otherLog Ratio of Actual to Potential Real GDP-10-8-6-4-2024681955:011957:021959:031961:041964:011966:021968:031970:041973:011975:021977:031979:041982:011984:021986:031988:041991:011993:021995:031997:042000:012002:022004:03PercentOkun’s Law Updated: What Happens with Changes in Ratio of Actual to Potential? When the ratio of actual to potential real GDP rises by 1 percent, the following happens (after allowing for lags)The unemployment rate falls by 0.50Productivity growth rises by 0.16Hours per employee rise by 0.10LFPR rises by 0.10Residual distributed across other factorsWhy Did Productivity Growth Accelerate Further, 2002-04? Hypotheses in 2003 BPEA paper–Savage corporate cost cutting (profits hardly fell in 1990-91 but fell by half in 2000-02)–Intangible capitalImplications of Industry Decomposition–Jorgenson and Stiroh: IT no role after 2000–Sichel’s new numbers show IT no more important in 2000-04 than in pre-1995Added Element from Jorgenson-Stiroh, forthcoming slowdown in “labor quality”Implications for InterpretationWhat does it mean that no special role of IT use in 00-04 or 01-05 acceleration?–Stiroh’s interpretation: a broad cross-the-board upsurge in TFP growth unrelated to IT investment–My 2003 BPEA interpretation, unusual pressure for corporate cost-cutting due to late 1990s bubble, overshooting, accounting scandalsStiroh: It’s permanent, but we don’t know whyMe: Big but temporary adjustment in corporate organization and cost structure. Trend is headed from 2.6 now to 2.25.Potential GDP headed from 2.9 to 2.6Effects of Productivity Growth on InflationDetails of the inflation model and its treatment of productivity are in BPEA 2005, no. 2 (and on my web site)“Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income”The 2005 BPEA paper was co-authored with Ian Dew-Becker“Triangle”Model of InflationDeveloped in late 1970s, intact since 1980Two sides of the triangle are demand and supplyThe base of the triangle is inertiaHow it Works: ExplainsHeadline PCE DeflatorDemand enters through the unemployment gap (TV-NAIRU)Supply shocks (changes relative to zero)–Food-energy effect–Relative price of imports–Changein trend productivity growthInertia: allow 24 quarters to enterHow the Model has Changed since 1980Before 1995, assumed the NAIRU was fixed at 6.0 percentActuals fell below predictions in 1994-95Adopted Stock-Watson technique of estimating a NAIRU that varied over timeThe technique simultaneously estimates the inflation equation coefficients and the TV-NAIRUThe TV-NAIRU with andwithout Supply Shocks024681012196219651967197019721975197719801982198519871990199219951997200020022005ActualTV-NAIRU without Supply ShocksTV-NAIRU with Supply ShocksThe Model Also ProducesPost-Sample Dynamic SimulationsHave Coefficients Changed?–Instead of 1962-2006, estimate only for 1962-1996–Lagged inertia effect for 1996-2006 then generated endogenously–This is the key technique to reveal changes in coefficients, or “drift”Here are the Three Supply ShocksFood and Energy Effect–This is simply headline PCE inflation minus core PCE inflationChange in relative price of importsChange in productivity trend growth, from the research summarized earlierA Consistent Theme: Greenspan’s Gifts!Food-Energy Effect, 1960-2016-3-2-10123419601962196419661968197019721974197619781980198219841986198819901992199419961998200020022004200620082010201220142016FAEChange in Relative ImportPrice, 1960-2006-15-10-505101520191725334149576573818997105113121129137145153161169177185193201209217225IMPChange in the ProductivityGrowth Trend, 1960-2016-0.5-0.4-0.3-0.2-0.100.10.20.30.40.50.61960196219641966196819701972197419761978198019821984198619881990199219941996199820002002200420062008201021220142016HPDEVThe Effect of FutureChanges in Prod’y Growth00.511.522.533.541996:011996:041997:031998:021999:011999:042000:032001:022002:012002:042003:032004:022005:012005:042006:032007:022008:012008:042009:032010:022011:012011:042012:032013:022014:012014:042015:032016:02Actual Productivity down to 2.2 Productivity up to 3.0 PredictedThe Dilemma thatBernanke has Inherited-1-0.500.511.522.533.520002000.82001.52002.320032003.82004.52005.320062006.82007.52008.320092009.82010.52011.320122012.82013.52014320152015.8Inflation LagUnemployment DeviationFAEHPDEVIMPWith a “Neutral”Set of SS, What is Need to Maintain 2.0% “Comfort Zone”?4.855.25.45.65.866.26.46.6-20-18-16-14-12-10-8-6-4-20246810121416182022242628303234363840UAUEUDUCUB1.522.533.5-20-17-14-11-8-5-21471013161922252831343740UAUBUCUDUEConclusion about Bernanke’s DilemmaDue to long inertia lags, nobody has noticed–Oil prices really do get into core inflation–So do rising relative import prices if/when dollar falls–So does the productivity turnaroundBernanke is now stuck with ~3.0 not 2.0 core inflationThere are only Two ChoicesThe first choice is to create a recession with several years of unemployment above 6 percentThe second choice is to abandon any pretense of a 2.0 (or even 2.5) core inflation targetNYT Jackson Hole coverage suggested the second option has already been chosen but they won’t say so (of course)No Time for Topic #3,Europe’s TurnaroundI’ll just leave you with two enticing graphsThe details are on my web site, look for the paper about “Tigers and Tortoises”(also co-authored with Ian Dew-Becker).Post-1995 reversal in EU-US productivity growthPost-1995 reversal in EU-US hours growthHere’s Productivity Growth, 1981-20040.00.51.01.52.02.53.03.519811986199119962001E.U. Output Per HourU.S. Output per HourPercentThe Stunning Turnaroundin Hours per Capita-3-2-10123419811986199119962001US Output per CapitaEU-15 Output per CapitaEU-15 Hours per CapitaUS Hours per Capita