RDP 2016-08: The Slowdown in US Productivity Growth: Breaks and Beliefs 7. Summary and Conclusion

We estimate a business cycle model of the US economy allowing for breaks in steady-state productivity growth. We find that the pace of steady-state productivity growth halved, most likely in the early 1970s. But this structural break was hard to identify in real time. The behaviour of households and firms indicates that their beliefs about steady-state productivity growth adjusted only in the 2000s.

Finding a break in steady-state productivity growth in the early 1970s is at odds with much of the recent literature, which has tended to identify breaks in the 2000s. Unlike previous work, however, our inferences are based on the behaviour of multiple data series and grounded in economic theory. The use of multiple data series is important because shifts in steady-state productivity growth have implications for the co-movement of many macroeconomic variables. We exploit this information to identify these shifts. And structural estimation is important because agents' beliefs about steady-state productivity growth can differ from reality. The failure of agents to identify shifts in steady-state productivity growth correctly alters the magnitude, and in some cases even the direction, of the responses of macroeconomic variables to these shifts in ways that cannot be gauged without the aid of an economic model.

Looking forward, our results suggest that the average growth rate of the US economy is likely to be considerably lower in the future than was the case for most of the post-war era. Of course, as was the case in the 1990s, there may be periods of unusually rapid technological innovation that provide a temporary boost to growth. But there may also be periods of stagnation, in which growth falls short of even its new lower average.

This paper has focused on the United States. But recent years have seen periods of weak productivity growth in other advanced economies, including the United Kingdom and Australia. And, as in the United States, short-term interest rates in many advanced economies have been at historically low levels since at least 2009. Whether these outcomes reflect transitory factors or shared slowdowns in steady-state productivity growth is an open question that future work could usefully address.