What is labor productivity, and how has it changed in the US over time?

Labor productivity is a key indicator of US economic health. Measuring worker efficiency — how much they produce in goods and services — offers a clear picture of economic growth and the strength of the labor force.

Over the past several decades, technological innovations, work experience, and investments into worker efficiency and equipment have driven the growth of US labor productivity.

What is labor productivity?

Labor productivity, also known as workforce productivity, is an economic indicator that helps people understand how efficiently workers produce goods and services. It indicates how much output is generated per labor hour.^[1]

In simpler terms, labor productivity helps gauge how effectively employees are using their time and resources to create goods and services.

Higher labor productivity rates translate into economic growth as workers become more efficient and require fewer resources to produce goods and services.

How is it calculated?

Calculating general labor productivity involves a straightforward formula. Here's how it works:

Labor productivity = Total output / Total labor hours

In this formula, total output refers to the overall number of goods and services produced by an individual, company, or industry. Labor hours include the combined time worked by all employees to create a good or service.

Average annual percent changes measure change over several periods stated at an average yearly rate.^[2]

What factors affect labor productivity?

Governments, companies, and individual workers can use various strategies to enhance labor productivity. Here are examples of improved labor productivity over time:

• Developing workers’ skills: Providing accessible education and training opportunities empowers workers to upgrade their skills, benefiting both their employer and the broader economy by enhancing the quality of US labor.
• Technological advancements: The adoption of new technologies—such as computers, automated machinery, new software programs, and telecommunications—can significantly elevate workforce productivity.
• Investing in capital: Governments and businesses can enhance labor productivity by ramping up investments in capital goods, such as new equipment, machinery, or land, and infrastructure, such as bridges, highways, and public transportation.

These are only a few ways to improve labor productivity. There are endless ways to innovate workforce productivity by lifting morale, investing in entrepreneurial ideas, and reducing economic costs.

How has US productivity changed over time?

US labor productivity has generally increased year over year since the end of World War II.

According to the National Center for Education Statistics, 11–20% of labor productivity growth between 1948 to 1990 can be attributed to increases in educational levels.

During this period, increased capital across US industries accounted for another 40% of growth in worker productivity. The remaining growth came from technical innovation, foreign trade, government regulation among other things.

According to the US Bureau of Labor Statistics (BLS), the business sector is a subset of the overall economy that excludes general government, private households, and nonprofit institutions. The manufacturing sector is a specific part of the business sector dedicated to producing goods.

Manufacturing sector labor productivity has declined slightly over the last decade, though the rest of the US business sector has continued to grow.

What are the nation’s most and least productive industries?

Between 2001 and 2021, electronics and appliance stores, online shopping businesses, and cable and subscription-based services saw the highest annual increases in labor productivity across US industries.

The BLS uses the North American Industry Classification System (known as NAICS codes) to classify and analyze data on US businesses.

Apparel manufacturing, metal ore mining, and the pharmaceutical and medicine industry saw net negative growth during the same period, indicating a decline in workforce productivity since 2001.

Labor productivity compared to wages

Since the 1970s, labor productivity has grown at a faster rate than real hourly compensation, meaning gains in workforce efficiency have outpaced pay gains.

This difference between real hourly compensation and labor productivity is known as the “wage gap.” This gap indicates that worker’s wages and purchasing power have lagged behind labor productivity growth.

Over the decades, the growth rates of labor productivity and real wages have fluctuated. During the 1960s, workforce efficiency peaked at 2.29% average year-over-year growth, accompanied by the second highest year-over-year increase in real wages at 2.26%. In contrast, the 2010s marked the slowest growth, Real wages rose 0.72% year-over-year on average, and average year-over-year labor productivity increased by 0.72% throughout the decade.

Which state is the most productive?

It’s difficult to pin down the most productive state because each state specializes in different industries, however, the BLS does index labor productivity by state, illustrating which territories have become more productive since the base year of 2012.

Forty-four states had net growth from 2012 to 2022. Washington, Colorado, California, Nebraska, and Utah led the rankings, all experiencing increases above 20%.

Six states had labor productivity decreases, with drops of more than 5% in Alaska, Louisiana, and Nevada.

However, between 2021 and 2022, labor productivity dropped in all but 13 states.

The Social Security Administration expects labor productivity to slow as employment recovers from the pandemic, especially as labor-intensive industries readjust to in-person work.

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