by Michael Roberts
The productivity of labour is an important ingredient of the rate
of real GDP growth. What happens to productivity (output per worker or
output per worker per hour) is important for mature capitalist
economies because real GDP growth can be considered as made up of two
components: productivity growth and employment growth. The first shows
the change in new value per worker employed and second shows the number
of extra workers employed.
In mature economies, employment growth has been slowing for decades.
So faster productivity growth is necessary to compensate. In Marxist
terms, that means slowing growth in absolute value (and surplus value)
must be replaced by faster growth in relative new value (or surplus
value). See my post,
In the first quarter of 2015, US productivity fell at a 3.1% annual
rate. For all of 2014, productivity grew by a modest 0.7%, even less
than the 0.9% productivity gain in 2013. From 1995 to 2000, US
productivity rose at average annual rates of 2.8%, reflecting in part
the boost the economy received from the internet boom. But since 2000,
productivity has slowed to annual rates of 2.1%.
The productivity slowdown is being replicated in all the major
economies. The US Conference Board, which follows productivity growth
closely, found that global labour productivity growth, measured as the
average change in output (GDP) per person employed, remained stuck at
2.1% in 2014, while showing no sign of strengthening to its pre-crisis
average of 2.6% (1999-2006).
The Conference Board reckons that the lack of improvement in global
productivity growth in 2014 is due to several factors, including a
dramatic weakening of productivity growth in the US and Japan, a
longer-term productivity slowdown in China, an almost total collapse in
productivity in Latin America, and substantive weakening in Russia.
Labour productivity in the mature capitalist economies grew by only
0.6% in 2014, slightly down from 2013 when it was 0.8%. Productivity
growth in the US declined from 1.2% in 2013 to 0.7% quoted above in
2014, whereas Japan’s fell even more from a feeble 1% to negative
territory of -0.6%. The Euro area saw a very small improvement in
productivity —from 0.2% in 2013 to 0.3% in 2014.
For 2015, a further weakening in productivity is projected, down to
2%, continuing a longer-term downward trend which started around 2005.
Despite a small improvement in the productivity growth performance in
mature economies (up to 0.8% in 2015 from 0.6% in 2014), emerging and
developing economies are expected to see a fairly large slowdown in
growth from 3.4% in 2014 to 2.9% in 2015. The decline is primarily a
reflection of the continuing fall in growth and productivity in China,
but also includes the negative growth rate of Brazilian and Russian
In the US, the ECRI, an economic research agency, argues that: “With
productivity growth and potential labour force growth both averaging ½%
a year, trend real GDP growth is converging to 1% a year.”
The ECRI goes on: “Recoveries have been weakening due to declines
in growth in output per hour (i.e., productivity), growth in hours
worked, or both. Taken together, they add up to real GDP growth. It’s
just simple math….So, unless there’s good reason to believe that
productivity growth will revive, trend GDP growth may very well stay
stuck in the 1% range for years to come. If so, growth slowdowns could
much more easily push growth below zero, leaving very little room for
error. Is the Fed ready?”
What the productivity growth figures show is that the ability of
capitalism (or at least the advanced capitalist economies) to generate
better productivity is waning. Thus capitalists have squeezed the share
of new value going to labour and raised the profit share to
compensate. But above all, they have cut back on the rate of capital
accumulation in the ‘real economy’, increasingly trying to find extra
profit in financial and property speculation. Look at the growth in the
accumulated stock of capital in the advanced capitalist economies. This
is a measure of the level of productive investment – it’s grinding to a
Take the UK. British real economic output is only about 3% higher
than at the beginning of 2008. Yet labour input (hours worked adjusted
for schooling and experience) is up 11% and the real value of the UK’s
net capital stock has grown only 6%. So underlying productivity has
plunged in the last seven years.
A recent paper by the National Institute of Economic & Social
Research (NIESR) suggests that the UK’s productivity fall may be due to
widespread weakness in TFP within firms. And that seems to be because
British companies prefer to employ cheap and temporary labour rather
than invest in training to raise skills and utilise new technology.
This goes back to the ‘hand car wash’ argument, where cheap labour means
that firms don’t need to invest in equipment. Instead new and existing
firms just find ways of profiting from the ready supply of cheap labour.
Indeed, a recent IMF paper concluded that labour market
‘deregulation’ (part-time, zero hours contracts, temporary, easy hire
and fire etc), introduced as part of neo-liberal policies over the last
few decades, may have raised profits but has done nothing to improve
productivity and might even have made it worse.
An important debate is taking place inside the US Federal Reserve on
the reasons for this slowdown. John Fernald, an economist at the
Federal Reserve Bank of San Francisco, has argued that the slowdown
started before the financial crisis and
was associated with the end of the information-technology driven boom
of the 1990s. David Wilcox, director of the Federal Reserve Board’s
research and statistics division, argued with colleagues in a 2013 paper that
the slowdown was associated with the 2007-2009 recession and a drop-off
in new business formation and in productivity-enhancing investment by
The Wilcox story is the more hopeful one. If the productivity
slowdown is associated with the recession, then presumably its effects
will eventually wear off and growth can get back on a faster path
without causing inflation. The Fernald story is troubling. If
productivity was really in a downtrend before the crisis, then Americans
might be stuck with an economy prone to serial growth disappointments
for the foreseeable future.
Now it has been countered by some mainstream economists that
productivity growth is not being captured properly in the data. Capital
investment growth is not really declining in the major economies. Much
of the apparent slowdown only reflects lower relative prices of
investment goods compared to consumer goods and services.
In the US, over the past two decades, prices of equipment have risen
much less than the GDP deflator. When correcting for this price effect,
the fall in US non-residential investment to GDP ratios is much less
pronounced. The phenomenon is even more noticeable in IT investment.
If IT prices had risen at the same rate as overall prices, IT investment
would now be nearly 1.2% of GDP higher than recorded, putting US total
investment closer to 20% of GDP, levels last achieved back in the 1990s.
So the argument goes; you only have to look around to see that
technological advance is making lives easier and quicker; and within
companies, productivity-enhancing innovatory technology is taking place
at an accelerating pace. The age of artificial intelligence is fast
coming. And it’s just this sort of investment that is low in cost and
requires a low threshold to deliver increased productivity.
Over the last 20 years, capex has been increasingly going into
hi-tech, R&D and cost-saving equipment and less so into
‘structures’, long-term investment in plant and offices. In 1995,
R&D was 23% of US business investment and structures were 21%. Now
the R&D share is 31% and structures are unchanged.
Neoclassical economics likes to use a measure of productivity called
total factor productivity (TFP). This supposedly measures the
productivity achieved from innovations. Actually, it is just a residual
from the gap between real GDP growth and the productivity of labour and
‘capital’ inputs. So it is really a rather bogus figure. But the
argument goes; maybe capex (investment) may have been growing slower,
but ‘capital productivity’ has been rising because that enigmatic
component, total factor productivity, has been rising, even if the data
on investment growth show a slowdown.
The trouble with this argument is that the data on TFP do not show
any sort of pick-up that would be expected from the great new IT
revolution that is under way. The latest Conference Board data show
that the growth rate of global TFP continues to hover around zero for
the third year in a row, compared to an average rate of more than 1%
from 1999-2006 and 0.5% from 2007-2012. Indeed, most mature economies
show near zero or even negative TFP growth. In China, TFP growth has
turned negative and in India it is just above zero, while in Brazil and
Mexico TFP growth continues to be negative.
So it is more likely that productivity growth has really slowed
because the impact of innovations is still not enough to compensate for
the failure of capitalists in most economies to step up investment.
Indeed, it is not the pure technology of the Internet and ICT by itself
which increases productivity and economic growth. Nobel Economics Prize
winner Robert Solow already noted in a famous phrase in 1987, six years
after the beginning of the mass introduction of personal computers into
the economy, that computer technology was not speeding up US
productivity growth: ‘You see the computer age everywhere but in the productivity statistics.’
This has not changed. In 1980, the year before introduction of the
modern personal computer, US annual TFP growth was 1.2% (5yr rolling
average). By 2014, US TFP was still only 1.2%. Therefore 34 years of
revolutionary technological developments in the Internet and ICT had led
to no increase in US productivity! The data therefore clearly shows
that technological advance in the internet and ICT sector alone do not
lead to productivity increases.
There was one phase during the 34 years of the internet and ICT
revolution when US economic efficiency sharply increased. In the period
leading to 2003, US annual productivity growth reached its highest level
in half a century – 3.6%. This was explained by a huge surge in
ICT-focused fixed investment. US investment rose from 19.8% of GDP in
1991 to 23.1% of GDP in 2000, fell slightly after the ‘dot com’ bubble’s
collapse and then reached 22.9% in 2005. The majority of this
investment was in ICT. After this, US investment fell, leading to the
sharp productivity slowdown.
The way in which US labour productivity followed this surge in
capital investment is clear from the chart. The correlation between the
growth in investment and the increase in labour productivity three years
later was 0.86, and after four years 0.89 – extraordinarily high. When
capital investment fell, this was followed by a decline in labour
productivity – showing clearly it was not ideas or pure
had caused the productivity increase.
In other words, productivity growth still depends on capital
investment being large enough. And that depends on the profitability of
investment. As argued ad nauseam in this blog: there is still
relatively low profitability and a continued overhang of debt,
particularly corporate debt, in not just the major economies, but also
in the emerging capitalist economies (see
Under capitalism, until profitability is restored sufficiently and
debt reduced (and both work together), the productivity benefits of the
new ‘disruptive technologies’ (as the jargon goes) of robots, AI, ‘big
data’ 3D printing etc will not deliver a sustained revival in
productivity growth and thus real GDP.
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