The Federal Reserve Bank of New York today released Is the United States Losing Its Productivity Advantage?—the latest article in its series Current Issues in Economics and Finance.
Authors Mary Amiti and Kevin Stiroh argue that strong labor productivity growth in China, India, and other emerging markets is likely to have mixed effects on the U.S. economy. U.S. firms and workers in direct competition with these economies may be subject to “potentially painful disruptions and reallocations.” At the same time, however, U.S. consumers will benefit from lower import prices and more import varieties, and U.S. exporters may see demand for their goods rise as foreign productivity growth boosts incomes abroad.
The authors begin their analysis by comparing productivity trends in the euro area, the emerging market countries, and the United States. Since 1995, labor productivity growth in the European Union countries has slowed to 1.0 percent—in large part, the authors note, because these countries are approaching the end of a “catch-up” phase in technological development, when achieving fast productivity growth becomes increasingly difficult. The United States has seen much stronger productivity growth, on the order of 2.0 percent a year. However, according to the authors, the economies of developing Asia have made the greatest gains, with productivity growth rates averaging above 4.0 percent. These economies are “still at the beginning of their catch-up phase and have ample high-return investment opportunities and scope for technological advance.”
Amiti and Stiroh also examine the indirect effects that the emerging markets’ strong productivity growth may have on the U.S. economy. The authors note, for example, that increased competition might spur U.S. firms to adopt new technologies and to restructure their existing operations: If “firms relocate the relatively inefficient stages of their production processes to countries where those stages can be carried out more cheaply, they are better positioned to expand their domestic output in stages where they have a comparative advantage.” The end result, the authors suggest, might be an increase in U.S. productivity.
Mary Amiti is a senior economist in the Bank’s International Research Function; Kevin Stiroh was a vice president in the Banking Studies Function at the time the article was written.