Productivity and the services of capital and labor

TLDR: In this paper, the authors argue that the slowdown in labor productivity growth that has occurred since 1968 and particularly since 1973 has probably been caused by a decline in the services of capital and labor relative to the measured quantities of these inputs.

Abstract: This paper argues that the slowdown in labor productivity growth that has occurred since 1968 and particularly since 1973 has probably been caused by a decline in the services of capital and labor relative to the measured quantities of these inputs. There is enough suggestive evidence of a decrease in effective labor input relative to measured labor hours to attribute about one-seventh of the productivity growth decline to this source. These effects have been concentrated outside the main manufacturing and industrial sectors. The most important cause of the growth slowdown in recent years seems to be a decline in the services of capital, caused by obsolescence and by the diversion of some part of capital spending to saving energy or product conversion. According to the model in this paper, conventional estimates based on the measured capital stock overstated the rate of total factor productivity growth through the mid-1960s, and the steady-state productivity growth rate of the US economy is lower than has been thought. Thus some part of the recent productivity slow-down is simply a return to the long-run steady-state path. An implication of this paper is that investment may do more to improve productivity growth than a coventional analysismore » predicts. There is an important qualification to this conclusion. We will gain little by adding substantially to the growth rate of gross output if we add little to output net of economic depreciation. The payoff to investment will be exceptionally large provided that new capital can avoid the problem of obsolescence that slowed productivity during the past decade. 64 references, 6 tables.« less