Introduction

   News about economic issues focuses on topics such as inflation, international competitiveness, standards of living, and long-run demographic challenges. Productivity growth rarely makes the headlines. Why is productivity growth important to the nation? Because higher productivity growth improves the outlook for all of these issues. It helps keep inflation in check, makes it easier for American businesses and workers to compete, raises standards of living, and reduces the difficulty of meeting long-run demographic challenges by increasing the total amount of resources available.

   Over the past 10 years, gross domestic product (GDP) per capita has grown faster in the United States than in almost every other advanced industrialized country. The United States owes its recent strong per capita growth in large part to strong labor productivity growth. A continuation of this productivity growth is essential to increasing real wages and maintaining the high standard of living in the United States.

   To remain competitive, U.S. businesses must hold costs down by getting the most out of the inputs they use-that is, they must increase labor productivity. Similarly, for U.S. workers to earn higher wages than workers in other countries while competing in a global economy, U.S. labor productivity must exceed that of lower-wage countries.

   Labor productivity growth also holds the key to dealing with the economic and fiscal challenges of a rapidly aging population. The total amount of goods and services produced in a country, measured by GDP, can grow only if productivity or hours of work increase. As the baby boomers (those born between 1946 and 1964) reach retirement, growth in total hours of work across the U.S. economy will slow, and the United States will have to depend increasingly on productivity growth to drive increases in GDP. While labor force growth will slow, the elderly population will expand relatively quickly. Strong GDP growth must continue in order to maintain the standards of living for both the working age and the dependent populations.

   The amount that U.S. workers produce has grown at remarkable rates in recent years. Since 1995, productivity growth has averaged over 2.5 percent per year, compared to an average growth rate of about 1.4 percent per year over the preceding 20 years. Most other major industrialized countries suffered a slowdown in productivity growth between 2000 and 2005, but in the United States, growth accelerated to about 3 percent, the fastest productivity growth of any G7 country-Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States-over that period. Given that the United States productivity was already among the highest and that these countries have similar access to technological improvements and financial markets, the sudden increase in U.S. productivity growth relative to other developed countries is especially impressive.