http://www.aei.org/publication/if-we-want-more-economic-growth-we-need-more-workers/If we want more economic growth, we need more workersMarch 7, 2016
James Pethokoukis
US GDP growth has been really weak during this recovery — just 2.1% since recession’s end — but potential GDP growth has been even weaker.
Think of potential GDP growth as reflecting the long-term growth rate of the economy. It has increased at only a 0.7% average annual rate the past five years, notes JPMorgan economist Michael Feroli in a recent report, due to weak growth in both the labor force and productivity. The labor force has increased at just a 0.5% annual rate (offset for now by the unemployed returning to the workforce) with productivity up 0.2%. Some context from Feroli: “Dating back to the 1950s, this measure of potential growth had never been below 2.0% before 2011 and had been as high as 4.1% as recently as the 2000s.”
At this point, Feroli sees potential GDP at about 1.4% over the next five years, assuming some productivity rebound. But for the economy to growth at its postwar average of 3.2% will require faster labor force growth or faster productivity growth or ideally both. Now I have written frequently about weak productivity growth, whether productivity is being mismeasured (new research on this), and how it might accelerate. Now, while Feroli doesn’t reject the possibility of a 1990s-style productivity surge, he finds no evidence of one looming:
Weak productivity growth probably will be with us for as far as the eye can see. But it is important to emphasize that the eye cannot see very far. Some economists, most notably Robert Gordon, believe that there simply will be no game-changing technological advances that will mirror what we have seen at various points in the 20th century. We don’t take such a dire outlook. Those periods of strong productivity growth tended to be associated with strong investment in newer capital goods. We are not seeing any inkling in the data that this is about to change. But that doesn’t mean that things are predestined never to change.
Public ire is understandable, but probably misplaced. The public is understandably frustrated with the slow growth of the economy, but nowhere in economics is it asserted that the pace of innovation will arrive at a steady, solid pace. Assuming slow productivity growth has to be a product of market failure is not only unjustified, but can be counterproductive if it oversells what policy can deliver. That said, there are certain “mom and apple pie”-type recommendations to spur productivity growth: better education, increased spending on R&D and infrastructure investment, etc.
Perhaps the lowest hanging fruit, however, is in labor supply. The decline in labor force participation is specific to the US, and thus presumably reversible. Returning prime-age participation rates to levels that prevailed ten years ago would tack on at least 2% to GDP, and perhaps a fair bit more.
About that last bit: What policies might boost labor force participation and supply (other than the obvious one of immigration)? Here are a few possibilities: a) work-friendly reforms to the Social Security Disability Insurance program so it’s not a permanent exit from the labor force; b) expanded work subsidies to make work more attractive; c) reduced payrolls taxes; d) reduced commute times through better public transit option; and d) relocation assistance for the unemployed.
And here are few recommendation from a lengthy 2011 McKinsey Global Institute report:
And this on greater workforce participation by women:
