This matters. Although economies can grow nicely in the short-run by employing more people, in the longer-run, growth must come because employees produce more. This is what Paul Krugman meant when he famously said "productivity isn't everything, but in the long run it is almost everything." Slower productivity growth, if it persists, thus means slower potential output growth.
And this matters for investors. If the economy grows slowly over the long-run, then so too will earnings and dividends. Investors who buy equities in the hope of growth will therefore be disappointed. It's no accident that there is a decent correlation between productivity growth and the price-earnings ratio on the S&P 500; both were high in the late 60s, low in the 70s, peaked again in the late 90s, and have since fallen.
Equally, the prospect of low growth might well be a big reason for negative real long-term interest rates: investors are keen to buy bonds because they don't anticipate good returns on growth-sensitive assets.
Figures on labour productivity might not grab newspaper headlines or investors' day-to-day attention. But they set the investment climate, if not the weather.
This poses the question: why has productivity growth fallen?
One reason that everyone agrees upon is that the recession reduced capital investment. This means workers have older, less efficient equipment to work with than they would have had if investment hadn't collapsed in 2009-10. This makes them less productive than they'd otherwise be.
Beyond this, there's disagreement. One possibility is that the recession has done lasting damage to productivity growth. Laurence Ball of Johns Hopkins University points out that, since 2007, the OECD has reduced its estimates of potential GDP in almost all developed economies, including the US. This is consistent with the idea that the financial crisis had long-term adverse effects upon productivity growth. For example, workers who lose their jobs see their skills stagnate while they are out of work, and so are less productive than they'd otherwise be even when they get into work. And recessions can permanently increase people's risk aversion. This deters them from starting new businesses or investing in risky innovations, both of which reduce productivity years later.
However, John Fernald of the San Francisco Fed has another explanation. He points out that productivity growth was slowing even before the crisis: in the three years to December 2007, non-farm business labour productivity grew at only half the rate it did in the previous three years. What's more, he says, the productivity slowdown has been most marked in information technology sectors and in industries which use IT intensively. This suggests that what we've seen is a return to normal after the big tech-fuelled productivity gains of the late 90s and early 00s.
He says it is the high productivity growth rates of the post-1945 and 1995-2004 periods that were exceptional. Lower growth is the norm.
But of course, there are exceptions to norms. Erik Brynjolfsson at MIT believes that technical progress is accelerating, and this might eventually raise productivity growth.
While this can't be ruled out, others warn that technical progress is inherently unpredictable; 1960s forecasts look comical with hindsight. "Productivity growth is a noisy process" says Stanford University's Robert Hall. In this sense, we cannot foresee how the investment climate will change.
