The Productivity Surge of the Nineties and Future Growth (Revised February 2003)
What does the U.S. productivity surge of the late 1990s imply about future economic performance? Was the sharp acceleration in the growth rate of actual productivity due mainly to cyclical factors or to a corresponding acceleration of potential or F.E. productivity growth which might be expected to be permanent? What might the future growth path look like in quantitative terms? We answer these questions using an updated version of the Hickman-Coen (HC) Annual Growth Model of the natural unemployment rate, the full-employment labor supply, and potential productivity and output. The theoretical structure of the model incorporates the underlying determinants of capital deepening instead of imposing a constant saving rate as in the standard neoclassical growth model, but it is shown that the response of productivity growth to an increase in the rate of technical progress is the same in the two models. The potential growth paths of productivity and output are projected to 2020, conditional on population forecasts, the rate of technical progress, and other factors. The projections are informed by a model-based analysis of productivity and output growth during the 1960-2000 sample period, including an examination of the output and unemployment gaps generated by the model and comparisons of the actual and potential growth rates achieved during the expansions of 1961-1969, 1982-1990, and 1991-2000.