A Steepening Slide

These Articles are Abridged Versions of Papers to be Delivered Today and Tomorrow at the Conference on U.S. Competitiveness, Jointly Sponsored by the New York Stock Exchange, the U.S. Senato Subcommittee on International Trade and Harvard University.

Measuring productivity, usually defined as output per man hour, helps us understand the process of technological change which sets limits on what we can accomplish. Professor Griliches acknowledges both the difficulties in measuring productivity and the limits of our understanding but proceeds to summarize economists' views as to what accounts for the striking decline in American productivity in recent years.

Productivity is affected by changes in capital equipment, materials, the mix of labor skills and output, efficiency, and technological change. In the early post World War II period, American productivity grew at an average annual rate of three per cent. About one-third of the growth resulted from increases in investment in physical plant and equipment, about one-third from improvement in labor force quality and shifts in inter-sectoral resource allocation, and the remainder from technological change and advances in knowledge.

Productivity had already begun to decline during 1965-1973, but economists disagree as to how much this can be explained by a less buoyant overall economy in the early 1970's. The sharp decline in productivity that occured in this period was concentrated in mining, construction, and public utilities and largely outside of the manufacturing sector.

Productivity growth has declined more rapidly since 1973. Among the villains cited by various economists are: the decline in real R & D expenditures, declines in the rate of investment in new capital equipment, the "greening" of the labor force, government regulation, the rise in energy prices, and inflation. Clearly investment in physical capital which declined sharply in the late 1970s is a major factor explaining about a quarter to a third of the recent slowdown in the growth of labor productivity. This explanation alone is not sufficient, for in 1965-1973 there was rapid growth in physical stock without discernable positive effect on labor productivity. The effects of government regulation are difficult to assess from a macro-economic perspective, but they have clearly contributed to the decline of productivity in mining and apparently in the public utilities sector as well. The decline in R & D expenditures in and of itself probably did not have appreciable effect on the decline in productivity growth. The rise in energy prices and the overall inflation rate have clearly caused serious problems requiring that resources be spent on coping with the immediate difficulties rather than permitting optimal planning and expenditure for plant expansion and modernization.

While the causes of the slowdown in productivity growth in recent years may be shrouded in uncertainty, there is no disagreement among economists that there has been a significant and far-reaching slowdown in the growth of productivity since 1973.

ZVI GRILICHES is the Ropes Professor of Political Economy.