Conference Series No. 22 Berndt Nordhaus Crandall Norsworthy Denison Perloff Gregory Solow Houthakker Thurow Kendrick Wachter Kopcke o% Federal Reserve Bank of Boston THE DECLINE IN PRODUCTIVITY GROWTH ,Proceedings of a Conference Held at Edgartown, Massachusetts June 1980 Sponsored by The Federal Reserve Bank of Boston THE FEDERAL RESERVE BANK OF BOSTON CONFERENCE SERIES No. 1 Controlling Monetary Aggregates June 1969 No. 2 The International Adjustment Mechanism October 1969 No. 3 Financing State and Local Governments in the Seventies June 1970 No. 4 Housing and Monetary Policy October 1970 No. 5 Consumer Spending and Monetary Policy: The Linkages June 1971 No. 6 Canadian-United States Financial Relationships September 1971 No. 7 Financing Public Schools January 1972 No. 8 Policies for a More Competitive Financial System January 1972 No. 9 Controlling Monetary Aggregates II: The Implementation September 1972 No. 10 Issues in Federal Debt Management June 1973 No. II Credit Allocation Techniques and Monetary Policy September 1973 No. 12 International Aspects of Stabilization Policies June 1974 No. 13 The Economics of a National Electronic Funds Transfer System October 1974 No. 14 New Mortgage Designs for an Inflationary Environment January 1975 No. 15 New England the Energy Crisis October 1975 No. 16 Funding Pensions: Issues and Implications for Financial Markets October 1976 No. 17 Minority Business Development November 1976 No. 18 Key Issues in International Banking ..... October 1977 No. 19 After the Phillips Curve: Persistence of High Inflation and High Unemployment June 1978 No. 20 Managed Exchange-Rate Flexibility: The Recent Experience October 1978 No. 21 The Regulation of Financial Institutions October 1979 CONTENTS Survey of the Factors Contributing to the Decline in U.S. Productivity Growth JOHN W. KENDRICK Discussion LESTER C. THUROW 22 Capital Accumulation and Potential Growth RICHARD W. KOPCKE 26 Discussion EDWARD F. DENIS.ON 54 Energy Price Increases and the Productivity Slowdown in United States Manufacturing ERNST R. BERNDT 60 Discussion PAUL R. GREGORY 9O Regulation and Productivity Growth ROBERT W. CRANDALL 93 Discussion HENDRIK C. HOUTHAKKER 112 Productivity Slowdown: A Labor Problem? MICHAEL L. WACHTER AND JEFFREY M. PERLOFF 115 Discussion J. R. NORSWORTHY 143 Policy Responses to the Productivity Slowdown WILLIAM D. NORDHAUS 147 Discussion ROBERT M. SOLOW 173 Survey of the Factors Contributing to the Decline in U.S. Productivity Growth John Wo Kendrick* Since the first half of the nineteenth century, the secular rate of growth in real gross product per labor hour in the U.S. domestic business economy gradually accelerated from about 0.5 percent a year to a maximum average annual rate of 3.5 percent in the subperiod 1948-66 (see Table 1). Since then, it declined to about 1 percent during the period 1973-78, and then fell abso- lutely in 1979 and will probably drop again in 1980 due largely to cyclical influences and continuing oil price increases. The declining trend-rate of productivity growth after 1966, and the abso- lute declines since 1978 have become an increasing matter of concern to policy-makers and informed citizens in the United States. Since productivity gains are the chief source of increases in real income per capita, the slowing has meant lesser gains in living standards. Since increases in factor produc- tivity are an offset to increasing factor prices, the slowing has been a signifi- cant element in the acceleration of inflation in unit factor costs and product prices. Although overall productivity.changes are only indirectly involved in balance-of-payments problems, the industries whose relative productivity growth has slowed the most have had the greatest difficulties in meeting foreign competition. Clearly, policies to promote productivity would be of considerable assistance in helping this country meet some of its more press- ing economic problems. As background for policy formulation, it is essential that we understand the chief sources of productivity growth, and thus the causes of the slowdown after 1966. A convenient and useful classification of sources of economic growth in general, and of productivity growth in particular, has been pro- vided by Edward F. Denison, together with estimates of the percentage point contributions of the various sources from 1929 through 1976.~ I have made use of his schema, with some modifications described below, as well as many of his estimates, supplemented by my own estimates for selected variables, and for all of them in the subperiod 1973-78 since most of his series end in 1976. * John W. Kendrick is a Professor of Economics at The George Washington University. ~ See Edward F. Denison, Accounting for Slower Economic Growth: The United States in the 1970s (Washington: The Brookings Institution, 1979). The estimates in this volume revise, extend and supplement those in his preceding work, Accounting for United States Economic Growth, 1948-1969 (Washington: The Brookings Institution, 1974). THE DECLINE IN PRODUCTIVITY GROWTH Table 1 Real Gross Product, Factor Inputs, and Productivity Ratios for Selected Subperiods, U.S. Domestic Business Economy: 1800-1973 (average annual percentage rates of change) 1800, 1855- 1889- 1919- 1948- 1855 1890 1919 1948 1973 Real gross product 4.2 4.0 3.9 3.0 3.8 Population 3.1 2.4 1.8 1.2 1.5 Real product per capita 1.1 1.6 2.1 1.8 2.3 Total tangible factor input 3.9 3.6 2.2 0.8 2.4 Labor 3.7 2.8 1.8 0.6 0.7 Capital 4.3 4.6 3.1 1.2 2.5 Total factor productivity ratio 0.3 0.3 1.7 2.2 2.4 Labor 0.5 1.1 2.0 2.4 3.1 Capital -0.1 -0.6 0.7 1.6 1.3 NOTE: The weights for capital in each of the successive periods, beginning with 1800-1855, are as follows: 0.35, 0.45, 0.34, 0.26, 0.28. The weights for labor are 1.00 minus the weights of capital. SOURCES: 1800-1890 based on Moses Abramovitz and Paul David, "Economic Growth in America: Historical Parables and Realities," Reprint no. 105, Center for Research in Eco- nomic Growth, Stanford University, 1973, tables 1 and 2; 1889-1973 from John W. Kendrick, Productivity Trends in the United States .(Princeton, N.J.: Princeton University Press for the National Bureau of Economic Research, 1961); estimates for 1948 forward revised and extended by the author. The Conceptual and Analytical Framework The sources of growth in real gross product and productivity shown in Table 2 relate to the U.S. private domestic business economy, for which largely independent estimates of outputs and inputs can be constructed. The excluded general governments, personal (households and private nonprofit institutions), and rest-of-world sectors, for which real product is assumed to move with real factor costs, comprise only about 15 percent of GNP as esti- mated by the U.S. Department of Commerce. It should be noted, however, that if the opportunity costs of nonmarket economic activities are estimated, the share of the nonbusiness sectors in the expanded GNP estimates rises to about one-half. But sincethe imputations are based on input data, they do not make possible estimates of productivity changes in the nonmarket activities. In fact, some of the official deflators for GNP, mainly banking and selected services, are based on unit factor costs, thereby imparting a small downward bias to the official real product and productivity estimates, assuming that there has been some increase in productivity in these industries.2 2 See John W. Kendrick, "Expanding Imputed Values in the National Income and Product Accounts," The Review oflncome and Wealth, Series 25, no. 4; December 1979. As of 1973, GNP adjusted to include the additional imputations was almost 64 percent larger than the offi- cial estimates. Since 1939, imputed values have grown faster than official GNP, especially when both are measured in terms of real factor costs. The Department of Commerce is currently engaged in expanding its imputations. CONTRIBUTING FACTORS KENDRICK 3 Table 2 Sources of Growth in Real Gross Product, U.S. Domestic Business Economy Percentage Points, Selected Subperlods, 1948-1978 Sources 1948-66 1966-73 1973-78 Average Annual Percentage Rates of Change Real Gross Product 3.9 3.5 2.4 Factor Input -- Total 1.1 1.9 1.6 Labor 0.4 1.4 1.3 Capital 2.~’: 3.3 2.3 Real Product Per Unit of Labor 3.5 2.1 1.1 Capital/Labor Substitution 0.7 0.5 0.3 Total Factor Productivity 2.8 1 .6 0.8 Sources of Total Factor Productivity Growth; (Percentage Point Contribution) Advances in Knowledge 1.4 1.1 0.8 R & D Stock 0.85 0.75 0.6 Informal 0.3 0.25 0.2 Rate of Diffusion 0.25 0.1 -- Changes in Labor Quality 0.6 0.4 0.7 Education & Training 0.6 0.7 0.8 Health 0.1 0.1 0.1 Age/Sex Composition -0.1 -0.4 -0.2 Changes in Quality of Land -- -0.1 -0.2 Resource Reallocations 0.8 0.7 0.3 Labor 0.4 0.2 0.1 Capital 0.4 0.5 0.2 Volume Changes 0.4 0.2 -0.1 Economies of Scale 0.4 0.3 0.2 Capacity Utilization Rate -- -0.1 -0.3 Net Government Impact -- -0.1 -0.3 Services to Business 0.1 0.1 0.1 Regulations -0.1 -0.2 -0.4 Actual/Potential Efficiency, and n.e.c. -0.4 -0.6 -0.4 n.e.c. = not elsewhere classified SOURCE: John W. Kendrick, based in part on estimates by Edward F. Denison, Accounting for United States Economic Growth, 1948-1969 (Brookings, 1974).