By Jeff Ferry, CPA Research Director
The productivity figures for the US economy in 2017, published by the Bureau of Labor Statistics (BLS) last month, show the US economy continuing to underperform on productivity growth, one of the most important metrics for the long-term health of the economy.
The labor productivity of our non-farm business economy rose just 1.2% in 2017, a pathetically low figure considering GDP growth last year was respectable, and should have put a tailwind behind productivity growth. Yet the productivity performance for 2016 was even worse. In that year, productivity actually fell by 0.1%. Over the five years 2013-2017, labor productivity growth averaged just 0.76% a year.
Our manufacturing productivity did even worse in this period, up just 0.7% in 2017, and up an average of just 0.44% per year over the last five years. To quote directly from the BLS press release: “Manufacturing sector productivity has grown less than 1.0% in each of the last 7 years. The average annual rate of manufacturing productivity growth from 2007 to 2017 is 0.8%, well below the long-term rate from 1987-2017 of 2.7%.”
A couple of observations about these statistics. First, they indicate the dire state of the US economy. Labor productivity is one of the most important drivers of long-term economic growth. In the 1945-1973 period, labor productivity often grew at better than 3% a year. That enabled companies to pay their employees more and to generate growth, raising living standards and optimism throughout the country. Poor productivity growth prevents rises in wages and living standards. According to the BLS report, real hourly compensation actually fell 0.7% in the non-farm business economy in 2017. In manufacturing, it fell 0.5%. In both sectors, it has been negative in three of the last five years. If American workers feel they have to work more hours to make the same income they did in previous years, they’re right. These figures prove it.
Secondly, these figures show that the “automation means the end of work” narrative in the media is incorrect. If US manufacturing was deploying automation and robots in a serious way, the labor productivity figures would be rising dramatically. Instead, current labor productivity growth is worse than the pre-robot era. Most of our manufacturing sectors are seeing declines, not increases, in output.
It’s Trade, Stupid
Trade is a major causal factor of our productivity stagnation. A tidal wave of imports over the last 20 years has wiped out or reduced in size many of our most productive industries. Take steel. The steel industry has made enormous strides to increase labor productivity, partly through using new technology and partly through better managed companies taking over the industry and surpassing the old, low-productivity dinosaurs. Yet in the last 10 years, US steel production has fallen by 20%, because of import competition and its close relative, uneconomic pricing. That makes the steel industry less of a factor in our economy-wide productivity statistics. In other industries, like auto production and apparel, wages have fallen in real terms. That encourages employers to use those workers in lower productivity jobs than before, when wages were higher. Lower hourly compensation is not only a negative for the worker getting that paycheck; it’s a negative for long-term economic growth. As our manufacturing sector shrinks, the economy-wide average for productivity gets pulled down.
There is an important link between the size of a nation’s manufacturing sector and its ability to deliver growth in living standards. You can see the link in Figure 1 below. On the vertical axis is the size of each nation’s manufacturing sector, averaged over the last 10 years. On the horizontal axis is the annual growth in labor productivity, also averaged over the last 10 years. The correlation is visible.
The standout performer in the period is Ireland, with productivity growth of nearly 5% a year. Since 2007, Ireland has increased the size of its manufacturing sector from 20% of GDP to 35% of GDP. The first time I visited Ireland (30 years ago), the economy seemed to revolve around the giant Guinness brewery in Dublin. Everyone either worked for Guinness or spent their time in one of the country’s thousands of pubs drinking its products. Today, the pharmaceutical industry accounts for 45% of Ireland’s manufacturing sector, while food and drink is a much smaller sector, and Ireland’s gross national income per person, at $52,010, is not far off the US figure of $56,800, and well ahead of the United Kingdom’s figure of $42,360. With its current rate of productivity growth, it won’t be long before Ireland becomes a richer nation on a per capita basis than the US.
Figure 1. Average labor productivity growth 2007-2016 vs. size of manufacturing sector. Source: CPA calculations based on OECD data.
South Korea of course is a well-known story of manufacturing-led and export-led success. In Europe, one can look at countries that emerged from the Communist world to see how manufacturing has benefited economic growth. Poland, the Slovak Republic, and Lithuania all have productivity growth above 2% a year, and manufacturing sectors above 18% of their economy. Of course, manufacturing on its own does not solve all problems, including some created by governments. Ex-communist countries like the Czech Republic and Hungary have sizable manufacturing sectors but have been unable to leverage them into faster productivity growth, probably because crony-capitalist government has propped up uneconomic companies. In this sense, the Slovak Republic was lucky: it did not have an old-fashioned communist-era manufacturing base that demanded coddling, so foreign manufacturers were able to move in, especially in the auto industry, and build spanking new high-productivity manufacturing facilities.
The two most ardent believers in free trade, the US and the UK, both show dismal productivity performances in this chart.
It’s also worth mentioning that Mexico’s performance defies comprehension. Its manufacturing sector, at 17.99% of total GDP, is larger than many other nations (the US is at 12.27%), its manufacturing sector has grown due to inward investment, it sits at the doorstep of the world’s largest consumer market, and yet labor productivity has actually gone backwards over these years. It suggests a government of stunning incompetence, which ought to be very worried about the presidential election coming up later this year.