U.S. Productivity Growth Powers Economic Boom Amid Slower Labor Market

Despite a slowing labor market and inflation, the U.S. productivity growth powers economy has continued to expand thanks to a surge in productivity growth. Businesses have found innovative ways to boost revenue without passing on higher costs to consumers, fostering a low-inflation boom. This phenomenon has allowed the U.S. to outpace economies like the EU and Canada over the past two years.

Quarterly Productivity Increases Sustain Economic Output

In 2024, U.S. workers’ productivity has increased by at least 2% compared to last year, marking the fifth consecutive quarter of growth. Over the past five years, average quarterly productivity growth has been 2.1%, a substantial improvement from previous decades. This growth has been crucial in sustaining economic output while keeping inflation in check.

Europe and Canada Lag in Productivity Growth

By contrast, Europe’s productivity is currently lower than in 2015, and Canada’s growth has averaged just over 0% annually since 2019. These figures highlight the U.S.’s distinctive advantage in improving labor efficiency, even as the global economic landscape remains challenging.

Federal Reserve Highlights Role of Productivity in Economic Growth

Federal Reserve Governor Adriana Kugler emphasized the importance of productivity growth in supporting economic expansion without risking overheating. She stated that productivity increases have enhanced the economy’s capacity for growth, which has played a vital role in maintaining economic stability despite a slower labor market.

Pandemic’s Influence on Productivity Surge

The early pandemic years saw a dramatic surge in productivity, as layoffs in low-productivity sectors like food service drove overall output. Although productivity briefly declined in 2021-2022, it reaccelerated last year, reflecting a longer-term trend of improved efficiency across sectors.

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Key Drivers: Labor Shortages and Technological Innovation

Economists suggest that tight labor markets have driven companies to adopt new technologies and restructure job roles. Innovations such as self-service checkouts and expanded multitasking roles have been pivotal in boosting productivity. David Kelly of JPMorgan Asset Management notes that “productivity is just another term for ‘no one left to hire.’”

Labor Mobility Boosts U.S. Productivity

The reshuffling of the workforce during the pandemic also contributed to higher productivity. Many workers moved to higher-responsibility roles, and remote work opportunities allowed them to find better positions across the country. This mobility has been a significant factor in driving U.S. productivity higher than in similar countries like Canada and Australia.

Startups Fueling Innovation and Productivity Growth

The rise of new businesses, especially in technology sectors, has further contributed to productivity gains. The number of high-propensity new-business applications has been about one-third higher than pre-pandemic levels. Small businesses are increasingly seen as hubs of innovation, leading to scalable productivity improvements as they grow.

Flexibility Drives U.S. Outperformance

The U.S. stands out for its ability to quickly adapt to economic challenges. According to Philipp Carlsson-Szlezak of Boston Consulting Group, the flexibility of U.S. labor markets has enabled workers to climb the productivity ladder, contributing to sustained economic growth and higher wages. This adaptability, combined with a strong startup ecosystem, has positioned the U.S. as a leader in productivity growth.