Domestic Economic Policy

Abstract

Gloomy assessments of its condition, prospects, and relative decline notwithstanding, the American economy remains the largest and most efficient in the world. Since the oil price shocks of 1973 and 1979, the United States has achieved higher rates of output growth than many other industrial countries, but smaller improvements in productivity. Having averaged about 2.4 per cent between 1890 and 1973, the annual rate of growth in productivity (defined as output per hour of all persons working in the non-agricultural business sector) fell to 0.7 per cent between 1973 and 1990. Output growth in that period was mainly a function of increased inputs, especially of hours worked and increased participation by women in the labour force. New waves of immigrants entered labour markets, too. During the 1980s, the United States created more jobs than any of its major competitors; the corollary was that real wages stagnated. Between 1990 and 1995, however, productivity grew at about 2 per cent per annum, and then rose sharply to 3.5 per cent between June 1994 and June 1995, before reverting to the long-term trend rate. Measuring productivity is more difficult than it was because of the continued relative decline of American manufacturing and the growth in services (manufacturing now accounts for only 18 per cent of US GDP compared to more than 30 per cent in the 1950s, whereas services now account for 55 per cent of GDP).