Are Regional Differences Slowing U.S. Productivity Growth?

July 11, 2017
labor productivity
Thinkstock/Erik Snyder

The slowdown in U.S. labor productivity growth in recent years has perplexed many economists. But was the slowdown experienced broadly throughout the country, or did some states play a bigger role in slowing growth?

Why Worry about Productivity Growth?

For The Regional Economist, Senior Economist YiLi Chien and Senior Research Associate Paul Morris studied the average growth rate for gross domestic product (GDP) in the nonfarm business sector—the standard sector used by the U.S. Bureau of Labor Statistics in its productivity analysis.

GDP growth in this sector was only 2.2 percent annually during the 2009-2015 expansion,1 compared with 2.8 percent annually during the 2001-2007 expansion, they noted.

They added that labor productivity growth (measured as growth in output per employee) was the key driver of economic growth during the 2001-2007 expansion. Over that period, labor productivity grew 2.1 percent annually, accounting for nearly 75 percent of real GDP growth.

During the 2009-2015 expansion, however, labor productivity only increased 0.6 percent annually, accounting for just 26 percent of real GDP growth, the two authors found.

Besides affecting GDP, low productivity growth has other implications, Chien and Morris explained. “Labor productivity growth is the key factor that increases per capita standard of living since it measures the average growth rate of the amount of goods and services that each individual can consume,” they wrote.

Variations in Productivity Growth

To gauge whether the slowdown was broadly felt, Chien and Morris calculated the difference in average labor productivity growth between the 2009-2015 and the 2001-2007 expansions for the nation and each state.

For the nation, the difference was –1.5 percentage points. That is, productivity growth was slower in the recent expansion, though it was positive in both periods.

Only two states—North Dakota and West Virginia—saw labor productivity grow faster in the 2009-2015 expansion than the 2001-2007 period, the authors found. In addition, the authors found that 13 states actually experienced negative productivity growth during the 2009-2015 expansion, while no states averaged negative growth during the 2001-2007 period. (A chart showing the differentials for each state can be found in The Regional Economist article “Slowdown in Productivity: State vs. National Trend.”)

The Housing Crisis and Slowing Productivity

Chien and Morris posited that the housing crisis may be a major contributor to the productivity slowdown for some states.

“States that experienced a large housing boom during the previous expansion have seen a bigger decrease in labor productivity than the national average,” they wrote. “For example, California, Nevada, Arizona and Florida each had more than a 2 percentage point differential in labor productivity growth between the two expansions.”

Chien and Morris concluded that the labor productivity slowdown has been a widespread national phenomenon, which suggests that the main cause is a national rather than regional factor.

However, “the boom and bust of the housing market in some regions and states may have played a role in explaining why some states experienced a deeper drop in productivity growth than others,” the authors added.

Notes and References

1 Although the expansion continues today, state and regional data were only available through 2015 at the time the article was written.

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