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The productivity puzzle

This is what good news on productivity looks like these days: The first quarter decline in hourly output per worker was not as steep as previously thought.

The Labor Department on Tuesday reported that first-quarter productivity fell at an annual rate of 0.6 percent. It dropped 1.7 percent in the fourth quarter, and the initial government estimate for January through March was a 1 percent decline.

Historically, this would be nothing to cheer about. But slow productivity growth has marked the period since the recovery began a half-dozen years ago.

In a speech Monday, Federal Reserve Chairwoman Janet Yellen listed “unusually weak” productivity growth among the chief uncertainties that cloud the economic horizon today.

“Understanding whether, and by how much, productivity growth will pick up is a crucial part of the economic outlook,” she said. “But this is a very difficult question.”

Why is productivity growth so important? Because, as Ms. Yellen noted, it is “the key determinant of improvements in living standards, supporting higher pay for workers without increased costs for employers.”

This is not solely a macroeconomic issue either; rates vary among regions and metropolitan areas. Brookings Institution growth data for 2000 to 2014 show the Rochester area lagging the U.S. average in output on a per-capita and per-job basis. Among the top 100 metro areas, our performance ranks about 70th.

What the future holds is only part of the productivity puzzle. Economists also have difficulty explaining why the growth rate has been so weak. In particular, why have dramatic advances in information technology failed to spur hourly output per worker?

Is Robert Gordon, author of “The Rise and Fall of American Growth,” right when he says digital innovations pale in comparison to earlier technology breakthroughs? Or, as others suggest, is the explanation that it takes time for people to learn how to use new technology effectively?

It’s in the interest of every business to solve this puzzle.

6/10/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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