The Productivity Slowdown of the 1970s

The largest slowdowns were in pipelines, auto repair, and oil and gas extraction - industries heavily affected by the energy crises of the 1970s. These industries also showed large declines in output growth over the same period.

In a study described as "economic archeology," NBER Research Associate William Nordhaus analyzes the slow productivity growth that hit the U.S. economy during the 1970s. His paper, Retrospective on the 1970s Productivity Slowdown (NBER Working Paper No. 10950), asks two main questions: First, was the slowdown in productivity growth during this period unusual by historical standards? Second, what were the industry sources of slowing productivity growth in the American economy?

In order to answer the first question, Nordhaus studies long-term data on U.S. productivity growth, focusing on productivity per hour for the nonfarm sector. He considers slowdown periods differing in length from five to twenty years and determines how many productivity slowdowns occurred from 1889 (as far back as the data go) through 2004. Nordhaus finds that the slowdown during the 1970s is not unique during this period; indeed, the productivity slowdown that began in the early 1900s was larger. However, the 1970s slowdown is much larger than any slowdown since the end of World War II.

The central section of the paper examines productivity growth by detailed industry. Nordhaus notes that comprehensive data on output and inputs are available from the U.S. Bureau of Economic Analysis (BEA) only since 1977. Working with the SIC industrial classification, Nordhaus and Alexandra Miltner have developed a comprehensive continuous set (available on the Internet) of data on real and nominal output, prices, and productivity from 1947 to 2001 for all industries. This new dataset allows Nordhaus to examine productivity trends prior to the 1970s slowdown as well as to break down the productivity slowdown by industry.

Nordhaus uses different methods for decomposing the changes in productivity growth, including a measure he calls "well-measured output" (WMO) that includes only those sectors with adequate deflation and price procedures. WMO shows a consistently higher rate of productivity than other measures. For total productivity from 1948 to 2001, WMO displays productivity growth of 2.59 percent as compared to 2.06 percent per year for the business sector. The traditional measure of productivity growth (defining productivity growth as the difference between the growth rate of output and the growth rate of inputs) shows a larger slowdown than other measures. The "welfare theoretic measure" -- defined as the productivity growth weighted by industry shares of nominal output -- shows an annual productivity slowdown of 0.69 percent, some 0.17 percent per year less than the rate of total productivity growth.

Nordhaus also investigates the sources of the productivity slowdown by detailed industry, examining which industries had the largest productivity slowdowns, comparing the 1959-73 period to the 1973-95 period. The largest slowdowns were in pipelines, auto repair, and oil and gas extraction - industries heavily affected by the energy crises of the 1970s. These industries also showed large declines in output growth over the same period. Nordhaus then assesses the extent to which individual industries contributed to the overall productivity slowdown. Again, industries affected by the 1970s energy crises -- such as pipelines, oil extraction, electric and other utilities, motor vehicles, and air transportation -- make up some two-thirds of the slowdown. He concludes, switching from archeologist to geologist, that "the energy shocks were the earthquake, and the industries with the largest slowdown were nearest the epicenter of the tectonic shifts in the economy."

However, "past is not prologue," Nordhaus explains. The productivity slowdown originating in the 1970s eventually gave way to a rebound in productivity growth in the new-economy sectors of the late 1990s. "As the economy made the transition from the oil age to the electronic age, the aftershocks of the energy crisis have died off and productivity growth has attained a rate close to its historical norm.

-- Carlos Lozada