U.S. Productivity Growth Still Trails Europe

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June 12, 2007

U.S. Productivity Growth Still Trails Europe

For Immediate Release: June 12, 2007

Contact: Dan Beeton, 202-293-5380 x 104

Washington, D.C.: A report by the Center for Economic and Policy Research shows that U.S. productivity growth has lagged behind Europe -- even during the IT boom from 1995-2005 -- when adjusted to measure rises in living standards.

The paper, "'Usable Productivity' Growth in the United States: An International Comparison, 1980-2005," by Dean Baker and David Rosnick, also finds that the U.S. economy's sustainable rate of usable productivity growth over the 1995-2005 period was 0.4 percentage points lower than the average of other OECD countries.

These calculations suggest that even with the 1995 productivity upturn that accompanied the IT boom, the U.S. has not been able to sustain the same rate of increase in living standards as other wealthy countries. The performance of the United States also appeared relatively worse in the 1980 - 1995 period.

"The U.S.' failure to keep up has been hidden, in part, by the huge increase in the current account deficit and the decline in net investment over the last decade," Dean Baker, Co-Director of the Center for Economic and Policy Research, and co-author of the study, explained. "But when the current account deficit stabilizes or shrinks in the coming years ahead, the rate of increase in living standards in the U.S. is likely to be slower than in other wealthy countries."

Since productivity growth cannot be directly translated into improvements in living standards, the authors made two technical adjustments to measured productivity growth to assess the rate at which the economy is allowing for rises in living standards: 1) A net measure of output (removing changes in the share of output that go to replace depreciated capital), and 2) A consumption deflator instead of an output deflator to assess the rate at which the economy can provide for increases in living standards.

"It is important to understand how well the U.S. has really fared," Baker said. "Rapidly increasing productivity growth can result in rapid increases in income, or leisure time, or some combination of both. And if these benefits are broadly shared, then the whole of society can benefit."