2004 Productivity Growth

The BLS has revised its estimates of fourth quarter productivity growth:

The Bureau of Labor Statistics of the U.S. Department of Labor today reported revised fourth-quarter seasonally-adjusted annual rates of productivity change–as measured by output per hour of all persons–and revised annual changes for the full year 2004.

In the fourth quarter, productivity increased 3.7 percent in the business sector, more than the 2.5 percent preliminary estimate published Feb. 3. In nonfarm businesses, productivity grew 2.1 percent, compared to the preliminary estimate of 0.8 percent (seasonally adjusted annual rates). On an annual average basis, productivity rose 4.0 percent in both sectors — the same as the preliminary estimate for the business sector, and 0.1 percentage point lower than previously reported for nonfarm businesses.

2004 marks another year in which worker productivity grew rapidly while worker compensation did not. The following chart shows the growing gap between productivity gains and compensation gains over the past decade.

Worker compensation and productivity typically move very closely together, but in recent years this link has weakened. Many people argue that the reason for this is international labor competition. But I’m not convinced by that argument; the growth of import competition was much more rapid during the 1990s than it has been over the past few years, and yet during the 1990s labor compensation kept up with productivity growth. I have a feeling that the answer has more to do with reduced domestic competition, and possibly a business-friendly regulatory and legal environment. Regardless, its an important phenomenon that needs to be addressed.