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The U. S. Productivity Growth “Explosion”: Dimensions, Causes, Consequences, Aftermath

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The U. S. Productivity Growth “Explosion”: Dimensions, Causes, Consequences, Aftermath

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The U. S. Productivity Growth “Explosion”: Dimensions, Causes, Consequences, Aftermath

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  1. The U. S. Productivity Growth “Explosion”:Dimensions, Causes, Consequences, Aftermath Robert J. Gordon, Northwestern University and NBER, NABE 48th Annual Meeting, NBER Session, Copley Place Marriott, Boston, September 11, 2006

  2. Brief 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• Research Papers on my web site, google “Robert J. Gordon” • Topic #1 on quarterly productivity behavior, today’s unpublished update of BPEA 2003 • Topic #2 on inflation, unpublished update of BPEA 2005 with added dire implications for Bernanke • Topic #3 on Europe, new paper on web site (unfortunately no time to talk about this)

  3. 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 releases

  4. Topic #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”

  5. 8-quarter Change in NFPB Output and Hours, 1955-2006

  6. Key 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”

  7. Notice the “Early Recovery Bubble”,8-qtr changes 1955-2006

  8. Trend 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 cycle

  9. Alternative U. S. NFPB Productivity Trends in Quarterly Data, 1954-2006

  10. 8-quarter Actual LPvs. the Average Trend

  11. The 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 -1.37

  12. What 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 2.50

  13. The “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.

  14. 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 household

  15. 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 growth

  16. Actual vs. Trend Growthfor Hours per Employee

  17. Actual vs. Trend Growthfor Labor Force Participation

  18. Actual vs. Trend Growthfor the Employment rate

  19. Actual vs. Trend Growthfor Wkg-Age Population

  20. Actual vs. Trend Growthfor the “Mix Effect”

  21. Actual vs. Trend Growthfor Payroll vs. Household Employment

  22. Two Measures of TrendPotential GDP Growth

  23. Potential 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 other

  24. Log Ratio of Actual to Potential Real GDP

  25. Okun’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 factors

  26. Why 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”

  27. 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 2.6

  28. Effects 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

  29. “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 inertia

  30. How 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 • Change in trend productivity growth • Inertia: allow 24 quarters to enter

  31. How 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-NAIRU

  32. The TV-NAIRU with andwithout Supply Shocks

  33. The 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”

  34. 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!

  35. Food-Energy Effect, 1960-2016

  36. Change in Relative ImportPrice, 1960-2006

  37. Change in the ProductivityGrowth Trend, 1960-2016

  38. The Effect of FutureChanges in Prod’y Growth

  39. The Dilemma thatBernanke has Inherited

  40. With a “Neutral” Set of SS, What is Need to Maintain 2.0% “Comfort Zone”?

  41. Conclusion 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 inflation

  42. There 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)

  43. 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 growth

  44. Here’s Productivity Growth, 1981-2004

  45. The Stunning Turnaroundin Hours per Capita