Productivity Growth
US labour productivity grew at 2.8% per year from 1947 to 1973. From 2005 to 2024, it has averaged 1.4% — half the post-war rate. Every other advanced economy shows a similar pattern. Whether the slowdown is a measurement issue, a temporary pause, or a new normal is one of the most-debated questions in economics.
Key insights
The slowdown is widespread
OECD-wide labour productivity growth has roughly halved since the 1995–2005 IT-boom era. The US, UK, France, Germany, Italy, Japan, South Korea all show the same pattern. Aggregate growth in the OECD has fallen from ~2% per year to ~1%. The decline cannot be blamed on one country, one sector, or one shock.
Multiple candidate explanations
Possibilities include: (1) measurement — digital goods and free services are mis-counted, true productivity is higher than headline; (2) the easy gains from electrification, internal combustion and IT are exhausted; (3) declining business dynamism — fewer startups, less labour-market churn; (4) declining R&D productivity — more researchers required to produce each new idea (Bloom et al. 2020); (5) aging populations and the secular shift to services.
AI is the leading re-acceleration bet
Generative AI has produced the first plausible case for a productivity re-acceleration since the IT boom. Early studies on coding (GitHub Copilot), customer service, writing and basic legal tasks show 20–40% time savings on specific tasks. Aggregate effect remains uncertain — productivity gains require capital deepening, organisational change and complementary investment to show up in national statistics. Historical precedent (the dynamo, the computer) suggests 10–20 year lags.
US labour productivity growth — five-year averages
% per year, real output per hour, nonfarm business sector
Key Finding: Three eras: post-war boom (1947–73), slowdown (1973–95), IT revival (1995–2005), and the current sustained low (2005–today).
Productivity growth — selected countries (2010–2024)
Average annual % growth in labour productivity
Key Finding: South Korea and the US lead; the UK and several southern European economies have averaged near zero.
Methodology & caveats
Labour productivity vs TFP
Labour productivity = output per hour worked. Total Factor Productivity = output per unit of combined labour and capital input. TFP is the residual that captures 'everything else' — technology, organisation, skill, market structure. Labour productivity can rise even if TFP is flat (more capital per worker); the productivity slowdown debate is largely about TFP.
Measurement issues
Digital goods (free search, free maps, social media) generate consumer surplus but little measured output. Services productivity is hard to measure (what's the 'output' of healthcare or legal services?). Hedonic adjustments for IT goods have grown harder as products integrate hardware and software. Brynjolfsson, Eggers and Gannamaneni (2018) estimated mis-measurement at ~0.5pp/year — meaningful but not the whole story.
Why it matters
Productivity growth is the single most important determinant of long-run living standards. A 1pp difference in annual productivity growth compounded over 50 years produces a 65% gap in income. The post-2005 slowdown, if permanent, implies the next generation will be roughly half as well-off relative to today as the previous generation was.