November/December 2020 | Vol. 25 No. 6
by Fred Ashton, Economist, NEMA
Productivity growth in the United States has downshifted over the past decade and has become an important focal point among economists and policy makers. Along with a growing labor force, increased productivity is a driving force of overall economic growth, increased wages, and corporate profits. Given the advancement in industrial automation equipment and data informatics over the same time period, the decade-long downshift is a conundrum.
Using multifactor productivity (MFP) data from the Bureau of Labor Statistics (BLS),1 we can compare how manufacturing in general—and the electrical equipment, appliances, and components manufacturing sector in particular—compares with productivity gains in the overall economy.
The BLS defines MFP as:
The efficiency at which measured inputs are utilized in producing outputs of goods and services, measured as output per unit of combined input.Combined inputs include capital and labor (for major sectors) or capital, labor, and intermediate inputs (for industries).
While the more widely followed labor productivity measure is often cited, it is important to factor in capital when discussing the productivity of the manufacturing sector.
Multifactor productivity growth in the private nonfarm business sector averaged 1.4 percent from 2000 to 2007. By comparison, overall MFP fell to a compound annual growth rate of 0.4 percent between 2007 and 2018. The decline among manufacturers was even more pronounced, dropping from 1.7 percent between 2000 and 2007 to -0.3 percent over the 2007-2018 period.
With growth averaging 1.5 percent from 2000 to 2007, electrical
equipment, appliances, and components manufacturers lagged productivity
growth in the manufacturing sector. However, from 2007 to 2018, the
industry struggled to sustain an average growth rate of 0.1 percent.
The nearby table shows the compound annual multifactor productivity growth rates for private nonfarm business; manufacturing; and the electrical equipment, appliances, and components sector during six periods as defined by the BLS.
|U.S. Average Compound Annual Growth Rates of Multifactor Productivity, %
||Private Nonfarm Business
||Electrical Equipment, Appliances, and Components
Economists have not reached a consensus as to why productivity growth, specifically manufacturing productivity, stagnated over the past decade. One possible explanation is that the adoption of technological advancement has been slow or not fully implemented and has yet to yield the highest levels of productivity. For an example, consider a sensor that provides limitless amounts of data that are not adequately leveraged to improve a process.
A second possibility, offered by Andrews, Criscuolo, and Gal in a 2015 Brookings Institution paper, is that “a productivity growth rate gap has opened between frontier firms and their less efficient industry cohorts.”2
Both explanations are plausible, but it is likely a combination of the two, mixed with public policies that discourage capital equipment and human capital investment, can explain the slowdown in manufacturing productivity. ei
1 Multifactor Productivity, U.S. Bureau of Labor Statistics, https://www.bls.gov/ mfp/mprdload.htm#Multifactor%20Productivity%20Tables
2 Chad Syverson, The Slowdown in Manufacturing Productivity Growth, Global Economy and Development at Brookings, August 2016, https://www.brookings.edu/wp-content/uploads/2016/08/the-slowdown-in-manufacturing- productivity-growth_august-2016.pdf