Slowed Productivity Growth of the US and Why It Matters

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Introduction

Productivity growth is an important parameter because it predicts the economic status of a country. The analysis of long-term and short-term trends shows that the economic productivity of the United States has been slowing down since 2010 after the recovery and expansionary phases following the global economic recession. Moreover, the decreasing birth rates and aging population amplify the impact of slowed productivity on the sustainability of economic growth in the United States (Peterson, 2017).

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Significant factors that explain the slowed productivity growth are dwindling efficiency, changing sectors of employment, decreasing the number of productive sectors, shrinking capital intensity, reducing business dynamism, and prevailing biased digitization of industries (Byrne et al., 2016; Syverson, 2017).

The slowed productivity growth matters because it weakens the economy by reducing the gross domestic product, increasing unemployment rates, diminishing income levels, and lowering the living standards of Americans (Salvatore, 2018; Mankiw, 2018). Therefore, the analysis of major factors explaining the slowed productivity growth would indicate markets and parts of the economy affected, as well as highlight economic significance to the United States.

Parts of the Economy Affected

Efficiency is a significant factor relating to the quality workforce that determines the rate of productivity. In the United States, a decrease in the efficiency in the labor market has contributed to a slowed down in productivity growth (Salvatore, 2018). Comparative analysis of the number of hours worked and products generated shows declining productivity over time. For instance, in the 1990s and the early part of the 2000s, the United States experienced high efficiency in productivity because the technology was incorporated in manufacturing, retail, electronics, and financial industries (Byrne et al., 2016).

However, the tech crash and the contraction period of the global recession decreased the efficiency of production and caused economic growth to slow in the United States. Peterson (2017) asserts that low birth rates and the aging population have reduced the workforce in the manufacturing industries. Chowdhury (2018) adds that labor contributes approximately 30% of the total productivity in the United States. These findings suggest that that the United States could only improve its productivity by enhancing efficiency in the labor market.

Since the growth rate and expansion of industries vary according to consumer interests, changing sectors of employment have contributed to the slowed productivity growth in the United States. The analysis of economic trends shows that there has been a marked shift in dominant employment sectors from manufacturing to service industries. The change in employment has decreased productivity because the manufacturing industry is a high-productivity sector, while the service industry is a low-productivity sector (Santacreu & Zhu, 2018).

The shift in employment trend implies that a constant workforce would not be able to sustain a high degree of productivity. As synergy is necessary for an economy to realize optimal productivity, a decreasing number of productive sectors and diminished combined effects have caused a slowdown in productivity growth (Mankiw, 2018). For example, from 1995 to 2005, synergistic effects wholesale, retail, electronics, and computer industries spurred a high level of productivity (Syverson, 2017).

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Furthermore, while over 20 sectors accelerated production in the early 2000s, fewer sectors, such as petroleum and transport industries, are some of the major drivers of the modern economy. Hence, the shift in the employment market from manufacturing to service industries, coupled with the decrease in the number of synergistic sectors, has slowed down productivity growth in the United States.

As capital is a factor of production, its utilization over time shows variations, which are associated with productivity growth. The analysis of the capital intensity of various sectors and industries in the United States indicates that it has declined and contributed to slow growth in production. Capital explains 11.3% of the variation in the production rate in the United States (Chowdhury, 2018). Specifically, the increase in the capital intensity of manufacturing industries from 1995 to 2004 correlated with the increase in productivity growth. In contrast, the decline in the capital intensity of manufacturing sectors since 2005 is associated with a drop in productivity growth. These relationships suggest that shrinkage in capital intensity is a major factor, which shows that investments play a role in productivity growth in the United States.

In the aspect of innovation, the dynamic nature of business and the digitization of industries are crucial factors that define productivity growth. Parameters that determine business dynamism are the rates of forming startups and creating jobs, as well as the frequency of closing down businesses and losing jobs (Mankiw, 2018). According to Syverson (2017), startups constitute 8% of the current market, which is a considerable decline from 13% in 1981. Chowdhury (2018) also notes that technology is a major driver of productivity because it accounts for 58.4% of the variation. Consequently, productive companies attract employees and boost their performance in competitive markets during recovery and expansionary phases of business growth. Moreover, the adoption and the use of technology have enhanced productivity in all industries.

However, variation in the adoption and the application of technologies has created unevenness in digitization. For instance, information communication technology (ICT), media, financial, and insurance industries have exploited digitization tools, while mining, agricultural, construction, and hospitality sectors have limited application of these tools. However, since industries that have adopted digitization are highly productive, they are not dominant in causing significant economic impact. Thus, failure to adopt and use innovations by major industries has slowed down the growth of production in the United States.

Why It Matters

Globalization has created a competitive world in which production is the primary measure of economic power. In this view, the slowed productivity growth weakens both local and global economic conditions of the United States. If productivity growth slows down, it implies that the per capita gross domestic product also slackens, resulting in weak economic growth (Byrne et al., 2016; Mankiw, 2018).

Consequently, a weak economic system causes unemployment rates to increase because productive sectors of the economy reduce, and the demand for the workforce declines. In essence, the labor market becomes competitive, and employers get a cheap workforce. Additionally, owing to the competitive labor market, wages and income levels drop to minimal limits where employees become exploited and oppressed. Ultimately, the living standards of Americans would lessen due to high unemployment rates and cheap labor. Therefore, the slow growth of productivity matters to the United States because it has serious economic effects on individuals and the general economy.

Conclusion

The analysis of the economic growth of the United States shows that the current productivity rates have become slower when compared to those of the previous two decades. Critical examination of the United States economy shows that numerous factors have contributed to slowed productivity growth. These factors constitute decreased efficiency, a shift in employment industries, a decline in the number of highly productive sectors, reduced intensity of capital, diminished dynamism in business, uneven digitization of industries, and recessionary phases in the business cycle.

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Therefore, a critical examination of the economic impacts of these factors shows that slowed productivity growth matters. Precisely, the slowed productivity growth has economic significance because it predicts gross domestic product, unemployment rates, income levels, and the living standards of Americans.

References

Byrne, D., Fernald, J., & Reinsdorf, M. (2016). Does the United States have a productivity slowdown or a measurement problem? Brookings Papers on Economic Activity, 17, 109-157. Web.

Chowdhury, N. M. (2018). Productivity and performance of U.S. economic growth: 1948-2015. Internal Journal of Economics and Management Sciences, 7(491), 1-12. Web.

Mankiw, N. G. (2018). Principles of economics (8th ed.). Cengage Learning.

Peterson, E. W. (2017). The role of population in economic growth. SAGE Open, 7(4), 1-15. Web.

Salvatore, D. (2018). Overview of technology, productivity, trade, growth, and jobs in the United States and the world. Journal of Policy Modeling, 41(3), 435-443. Web.

Santacreu, A. M., & Zhu, H. (2018). Manufacturing and service sector roles in the evolution of innovation and productivity. Economic Synopses, 2, 1-3. Web.

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Syverson, C. (2017). Challenges to mismeasurement explanations for the U.S. productivity slowdown. Journal of Economic Perspectives, 31(2), 165-86. Web.

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BusinessEssay. (2022, January 14). Slowed Productivity Growth of the US and Why It Matters. Retrieved from https://business-essay.com/slowed-productivity-growth-of-the-us-and-why-it-matters/

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BusinessEssay. 2022. "Slowed Productivity Growth of the US and Why It Matters." January 14, 2022. https://business-essay.com/slowed-productivity-growth-of-the-us-and-why-it-matters/.

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