Productivity Growth

   Capital deepening, and efficiency gains have contributed to productivity growth in recent years. It is important to note that the relative sizes of these contributions are only approximate and that some increases in the quality of labor and capital may be counted as efficiency gains. For example, economists can accurately measure education levels of the labor force, but on-the-job training is also commonplace and measuring the impact of this training on skill levels is difficult. Similar issues arise in adjusting for the quality of capital, particularly during periods of rapid technological changes. The net result is likely an understatement of skill increases and capital deepening, and a resulting overstatement of efficiency gains.

   Over these 15 years, skill increased at a fairly steady pace of about 0.3 percent to 0.4 percent per year. The sources of this increase are increased rates of college attendance and the increased experience of the workforce. Increases in skill have been an important source of long-run increases in labor productivity, and help explain why the United States has high income levels relative to other countries. Continuing a steady increase in skill is vital to maintaining solid productivity growth into the future.

   But even when educational attainment among the young rises substantially, the skill level of the workforce as a whole evolves slowly. Because skill has increased at a relatively steady rate, it cannot be the source of the recent acceleration in productivity growth. Instead, capital deepening and efficiency gains have been the key productivity-raising factors. Between 1995 and 2005, increases in the quality and quantity of the U.S. capital stock accounted for 1.1 percent per year in productivity growth in the United States, more than doubling the contribution of capital to productivity growth relative to the 1990 to 1995 period. The surge in productivity in the late 1990s resulted not just from a rapid increase in the number of machines used in U.S. production, but also from large quality improvements to the capital stock. Many of these improvements came from the revolution in information technology, which is commonly accepted as the initiating force behind the acceleration. But investment in IT capital alone was not the whole story. Firms needed to develop processes that best used the new capital. In many ways, the first increase in productivity growth (the higher growth rate between 1995 and 2000) was due to increased capital, while the second boost (in the period between 2000 and 2005) occurred as firms became better and better at using the new technology.