Higher productivity is critical for sustainable economic growth and is directly linked to higher living standards—a highly productive workforce is well positioned for higher compensation, and ultimately better living standards.
The Potential Growth Rate of an Economy Is Governed by Two Major Factors:
- Labor force growth—how many workers are available to produce goods and services, and
- Productivity—how much output can the labor force generate from the economy’s assets?
Productivity-induced higher wages and living standards are important drivers of future demand for goods and services. Consequently, higher productivity is critical for both the supply and demand side of an economy.
Higher productivity puts downward pressure on unit labor costs (compensation gains minus productivity growth), which ultimately results in lower inflationary pressures.
This gives the Federal Reserve flexibility on interest rates and is a major driver of prolonged economic expansions.
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