Productivity Slowing Isn’t Just in the US, and That’s a Problem

Sometimes I think that RealityChek could easily justify its existence simply as an exercise in granular analysis – a fancy way of saying looking at the details of research findings and various statistics sets. You’re the ultimate judge of course, but consider some revelations from the weeds of some new global productivity data released this week by The Conference Board (and first reported by Chris Giles of the Financial Times). They could speak volumes about the raging debate in the United States about trade, manufacturing, and economic competitiveness.

First a word of warning: Even the snootiest economist will admit that measuring productivity and its changes is one of the discipline’s biggest challenges. And if the U.S. government has its problems compiling definitive statistics in this field, imagine the difficulties faced by governments in developing countries, which simply can’t afford to devote many resources to the task, and where much economic activity is off the books. Then there are the issues created by countries like China, where even the leadership acknowledges substantial books-cooking at all levels of government – especially local.

All the same, the Conference Board report was especially important because it claims that the productivity slowdown being suffered by the United States is showing up all around the world. Globally, the business research group says, labor productivity (output per person hour of work) grew last year at the same weak 2.1 percent pace as 2013. But 2014 labor productivity gains weakened everywhere but India and sub-Saharan Africa, and it fell in Japan.

Even worse, growth in total factor productivity (which includes all inputs into production, not just labor) has been nearly non-existent across the globe on average for the third year in a row, and that’s a worse stretch since 1999. And The Conference Board predicts another drop for 2015 in labor productivity growth – led by low-income countries, where it should be greater, all else equal, due to catch-up effects.

The Board has done a great job presenting tables and charts that describe the picture region-by-region, country-by-country, and even on the basis of high-income versus low-income countries. But for those following American competitiveness issues, and especially the trade and globalization angles, they raise two big questions.

First, although it’s widely contended – including by President Obama – that the United States is gaining competitiveness largely at China’s expense, the productivity numbers say exactly the opposite. It’s true that China’s labor productivity growth has fallen recently from the lofty 9-plus percent average annual growth achieved between 1999 and 2012 – no doubt largely due to increasing wages. But the decrease has only been to a seven percent rise in 2014. In the United States, the decline has been proportionately greater – from annual average gains of 2.4 percent between 1999 and 2006 and 1.3 percent from 2007 to 2012 to 0.5 percent in 2014. Eccch!

Moreover, the Conference Board report doesn’t contain any information about the Chinese productivity numbers that matter most – those for export-oriented manufacturing. That’s where the competitiveness rubber hits the road vis-a-vis the U.S. economy. It’s also where China has benefited enormously from an influx of technology and management expertise from American and foreign-owned multinational companies.

The figures are different for total factor productivity (TFP – which is also called multi-factor productivity), but still no slam dunk for the U.S. comeback meme. In America, this form of productivity increased at an average annual rate of one percent from 1999 to 2006, and 0.2 percent from 2007 to 2012. In 2014, it rose by only 0.1 percent. The comparable Chinese performance was worse. TFP productivity jumped at an annual average rate of 4.4 percent between 1999 to 2006, slowed to an annual average of 2.7 percent in the next six years, and actually fell by 0.1 percent last year. But again, there’s no break-out for export-oriented manufacturing.

Then there’s the Mexico story. It’s also widely claimed that Mexico has profited from China’s faltering competitiveness. The overall productivity numbers are screaming that nothing of the kind should be happening. South of the border, labor productivity has barely budged since 1999, though notable improvement was registered in 2013 and 2014. And the TFP performance has been nothing less than disastrous, with absolute declines (not declining growth, but simple decreases) accelerating since 1999. At the same time, we lack breakouts for both manufacturing (which is overwhelmingly export-led) and for export-oriented manufacturing in particular, which is overwhelmingly dependent on the American market, and which has also received much foreign knowhow.  

Again, given the ongoing uncertainties about productivity measurement, all these figures should be taken with a boulder of salt. But here’s one potential implication no one should like: If there’s no evidence that changes in relative productivity are working in American industry’s favor, and trade policy clearly has not helped (judging from record recent U.S. deficits), then it looks like whatever manufacturing renaissance we’ve seen has been spurred by producers’ desire to be closer to their markets (for which no policy or business practice can take credit) and falling wages (for which no policy or business practice should want to take credit).