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The link between productivity growth and living standards

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A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for March 22, 2000

The link between productivity growth and living standards

Labor productivity is a measure of the amount of goods and services that the average worker produces in an hour of work. The level of productivity is the single most important determinant of a country’s standard of living, with faster productivity growth leading to an increasingly better standard of living.

Living standards can be measured in different ways, but one good indicator for measuring national living standards is the average annual growth in the inflation-adjusted income of the typical American family. Ideally, in an economy in which workers share in the fruit of their labor, annual income growth should track productivity growth.

The figure below shows the average growth in labor productivity over economic expansions from 1949 through 1999. Labor productivity has grown at about a 2.2% annual rate over the current economic expansion, which began in March 1991. This is better than the rate achieved in the expansions of 1982-90 (1.8%) and 1975-81 (1.5%), but below the rates in all the preceding expansions (between 2.3% and 3.2%).

From 1949 through 1969, family incomes grew at a faster rate than productivity — partly due to rapidly growing wages but also due to the increased number of women entering the workforce, which boosted family incomes. From 1970 on, however, median family income has grown more slowly than productivity, despite a continued growth in the total number of hours that family members work in a year.

* Median family income data in this business cycle includes 1991-98.

Source: From The National Bureau of Economic Research (NBER) homepage, “US Business Cycle Expansions and Contractions.” The March 1975 through January 1980 and July 1980 through July 1981 recoveries were combined for the purposes of this graph. All post-WWII recoveries were included except October 1945 through November 1948. (http://www.nber.org/cycles.html)

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