ECONOMIC REPORT OF THE PRESIDENT

prices weakened and the global economy slowed during 2015 and 2016, both
the energy-producing sector and manufacturing have struggled. A shrinking
role for these capital- and technology-intensive sectors reduces output per
hour.
In the labor market, there is some evidence that the improving economy
is drawing in workers who have at least temporarily lower productivity,
which also reduces measured productivity growth. Newly employed workers
tend to receive lower wages, presumably because they are at least temporarily
less productive than their more experienced co-workers. Partly for these reasons,
it is not unusual for measured productivity growth to be higher early in
a business cycle recovery and slower as a business-cycle expansion matures
as workers are added back onto payrolls, though this is actually an overall
positive development for the economy as long as it moves the economy
towards full employment. Since 2011, newly employed workers have made
up a larger-than-normal share of the workforce as employment growth has
boomed. This has suppressed wage growth by 0.5 to 1.0 percentage point
over this period. These newer hires may have lower skills or productivity
than otherwise similar workers, or their skills may have eroded during their
extended time out of work. Adding relatively more of these below-medianwage
workers may have temporarily depressed productivity growth.
Longer-standing declines in the fluidity and dynamism of the economy
may also be contributing to slower productivity growth. The entry of
new firms has been slowing for decades and, to the extent that these firms
drive both investment and productivity growth, their decline is important. A
pessimistic view put forward by economist Robert Gordon is that the world
economy may have simply run through the best productivity-enhancing
innovations such as the steam engine, the telephone, and indoor plumbing
while more recent innovations may not have the same impact on output
(Gordon 2012). This pessimistic view of our future is not universally held.
The world has more educated and connected people than at any time in history.
Investment in intellectual property products has been strong throughout
the recovery. Spending on the research and development component
of investment (R&D) in particular has risen to its highest share of GDP on
record, suggesting good prospects for continued innovation remain.
Of the possible explanations, it appears that more cyclical or shortterm
explanations explain a large portion of the slowdown. In particular,
to the degree that the productivity slowdown is caused by an investment
bust, that may actually be encouraging for the future outlook. It means we
are not out of ideas or permanently mired in secular stagnation, but instead
just need to invest more. Not only do we have policy tools to help push in
that direction, but to some degree such investment busts have historically
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