ECONOMIC

While allocation of resources to research and development should generatetechnical progress and increase residual productivity growth, thequantitative relation between productivity and research is not well documented.Even though a close causal relation between aggregate researchand development expenditures and residual productivity growth cannot beproved, such expenditures and their share of total output give some indicationof probable productivity growth in the future. Research and developmentexpenditures, which grew rapidly from 1955 to 1969, have fallen inreal terms since 1970. The share of research and development in GNPreached a peak of 3.0 percent in 1964 and fell to 2.3 percent in 1975.Although changes in labor force composition and slower growth in fixedcapital per worker have been a partial cause of the productivity slowdownin the last decade, much of it must be attributed to other factors. Significantlygreater productivity may be generated by the technical improvementsincorporated in new capital equipment, a consideration which would increasethe impact of the slowdown in the growth of the capital-labor ratio.However, it seems unlikely that the effect of this "embodied" technicalprogress could explain most of the large difference in residual productivitygrowth before and after 1966.Since the productivity slowdown coincides with the entrance into thelabor market of those born during the post-World War II baby boom, theslowdown in productivity may be in part a consequence of the time requiredto adjust to changes in relative factor proportions. If so, productivity growthsimilar to that in 1966-76 may continue through 1980, since the labor forceis projected to grow at relatively high rates until that time. After 1980 thegrowth rate of the working-age population will decline, and the labor forcewill expand more slowly unless the slower population growth is offset by increasesin the proportion of the population in the labor force.THE FULL-EMPLOYMENT UNEMPLOYMENT RATEAssessing long-run trends in economic growth requires a standard to measurelabor resource utilization. Although an explicit definition is difficult, thefull-employment unemployment rate is generally understood to mean thelowest rate of unemployment attainable, under the existing institutionalstructure, that will not result in accelerated inflation. Given the inexactrelation between changes in the rate of inflation and the rate of unemployment,estimates are necessarily imprecise, but in the early 1960s the Councilof Economic Advisers selected 4 percent as an estimate of the full-employmentunemployment rate in the economic circumstances existing at thattime. This estimate referred to the overall measure of unemployment as apercentage of the civilian labor force and was based on an examination ofeconomic conditions in the mid-1950s when the overall unemployment ratefluctuated around 4 percent. During the 20 years since then a number ofrelevant changes have occurred which give reason to believe that the fullemploymentunemployment rate equivalent to 4 percent in the mid-1950shas increased.48