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Why Has Labor Market Productivity Slowed Down?

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Rick Rieder explains why slowing productivity is a statistical mirage.

One of the greatest economic mysteries out there, according to many market watchers: Why labor market productivity has slowed sharply around the world in recent years.

As my co-authors and I write in a new BlackRock Investment Institute paper, “Productivity Slowdown Puzzle: Structural, Cyclical or Erroneous,” the slowdown in productivity matters. In a world where developed market workforces are shrinking thanks to aging populations, productivity will be the key driver of potential economic growth rates in the long term.

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Market Realist – Higher labor productivity is a panacea for current economic gloom.

Labor productivity is essential data that indicate the efficiency with which economic output is generated by a country’s workforce. In recent years, labor productivity growth has slowed down significantly in most of the OECD (Organisation for Economic Co-operation and Development) countries. This decline is broadly spread across sectors. Labor productivity growth in the United States (IJJ), which averaged 2.6% per annum from 1995 to 2010, has fallen to 0.4% since then.

What caused labor productivity to decline in many countries simultaneously? That’s a mystery to many market pundits. After all, labor productivity growth is critical for healthy growth of an economy. Slower growth means living standards can’t rise as rapidly since it takes longer to make economic progress. In the future, higher labor productivity will still be a major driving force for rapid economic growth in many countries.

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Labor productivity becomes all the more important for developed countries because the working-age population continues to shrink. For instance, the working-age population in OECD countries contracted from 66.7% of the total population in 2000 to the current 66.4%. The same figure for the United States (IWD) was 66.7% in 2003 but is currently 66.4%. The Eurozone (HEZU) (IEV) witnessed an even larger fall in the working-age population to the current 65.5% compared to 67.2% in 2000.

In the rest of this series, we’ll try to solve the mystery behind deteriorating labor productivity in many developed countries. We’ll also discuss the role technology (VGT) has in influencing productivity growth. We’ll touch on the potential flaws in traditional metrics used to measure productivity.

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