Press Releases

News from EPI The recent productivity slowdown could be reversed by giving the economy “room to run”

In a new report, EPI Research and Policy Director Josh Bivens writes that recent weakness in productivity growth is just one more symptom of shortfall in aggregate demand that has characterized the post-recession U.S. economy. Moreover, policies to rein in the economy’s growth in coming years—like interest rate hikes from the Federal Reserve—risk keeping productivity growth slow for years to come.

“Simply put, businesses’ incentives to invest in equipment and technology to make workers more productive are blunted when labor is so cheap,” said Bivens. “A tighter labor market and the rising wages that come with it would provide an incentive to boost workers’ productivity and will thus boost investment.”

The last four years have seen an extraordinarily sharp deceleration in productivity growth, with productivity coming in below 1 percent for three years. While the reasons for this slowdown have been the subject for much speculation, Bivens argues that it is primarily the result of weak aggregate demand. A “high-pressure” economy, with low rates of unemployment and stronger wage growth, would likely induce faster productivity growth. This high-pressure economy can be aided by either more expansionary fiscal or monetary policy. If instead of going this route, policymakers prioritize public spending cuts or raise interest rates, writes Bivens, we risk “locking in” this sluggish productivity going forward.