TOTAL FACTOR PRODUCTIVITY – 2021
Private nonfarm business sector total factor productivity (TFP) increased 3.2 percent in 2021, the U.S. Bureau of Labor Statistics reported today. (See table A.) The 2021 increase in TFP reflects a 7.4-percent increase in output and a 4.1-percent increase in the combined inputs of capital and labor. Capital input grew by 2.0 percent and labor input–which is the combined effect of hours worked and labor composition–increased by 5.3 percent.
Total factor productivity (TFP) is calculated by dividing an index of real output by an index of combined inputs of labor and capital. Total factor productivity annual measures differ from BLS quarterly labor productivity (output per hour worked) measures because the former also includes the influences of capital input and shifts in the composition of workers. Measures for the most recent year of this release are preliminary estimates. See the Technical Notes for additional information.
Private business sector total factor productivity also increased 3.2 percent in 2021, as output increased 7.2 percent and combined inputs increased 4.0 percent. (See table A.)
Total Factor Productivity Trends
The 3.2-percent growth in private nonfarm business TFP in 2021 was the largest growth since 1983 and resulted from strong output growth outpacing growth of combined inputs. The 7.4-percent growth of output in 2021 was the largest output growth since 1984, while the combined inputs growth of 4.1 percent was the largest growth for the series since 1997.
In 2021, both output and combined inputs were at higher levels than their pre-pandemic levels of 2019. The level of output is 2.7 percent higher than 2019, while the level of combined inputs is 1.6 percent higher. The quick recovery of these measures from the 2020 COVID-19 recession is in sharp contrast to the recovery seen in the previous 2007-09 Great Recession, when it took output 4 years to recover to the 2007 levels and 5 years for combined inputs to recover.
While combined inputs have recovered from the effects of the pandemic, not all of the input components have returned to pre-pandemic levels. Combined input growth is made up of growth in three components: capital input, hours worked, and labor composition. Capital input growth has slowed from the pre-pandemic growth of 3.3 percent in 2019 to 2.0 percent in 2021. Hours worked grew 5.4 percent in 2021, the largest growth in the series since 1984, however hours worked levels remain 1.7 percent below the 2019 level. Labor composition experienced historic growth in 2020 (1.5 percent) but 2021 grew much more slowly (0.1 percent) even below the average growth experienced over the past 20 years (0.4 percent).
Labor Productivity Trends
Labor productivity growth is the approximate sum of three components: total factor productivity growth, the contribution of capital intensity, and the contribution of shifts in the composition of labor. In 2021, private nonfarm business labor productivity increased 1.9 percent. (See table B.)
The contribution of capital intensity to labor productivity growth declined 1.3 percent in the private nonfarm business sector in 2021. This was the largest annual decline since the series began in 1948. Capital intensity is the ratio of capital input growth to labor hours growth. The 2021 decline is a result of choices toward hiring labor and working more hours rather than investing in more capital. The 2021 decrease in this measure was driven by the increase in hours worked of 5.4 percent relative to the slower capital input growth of 2.0 percent in 2021.
The contribution of labor composition to labor productivity for private nonfarm business had no growth in 2021 due to minimal labor composition growth. This follows record growth in the contribution of labor composition in 2020 of 0.9 percent. Labor composition estimates the effect of shifts in the age, education, and gender composition of the workforce on hours worked. The deceleration in the labor composition growth from 1.5 percent in 2020 to 0.1 percent in 2021 isprimarily due to lower paid workers reentering the labor market in 2021 following employment declines during the COVID-19 pandemic.(See table A).
Detailed Capital Input Trends
Capital input in the private nonfarm business sector increased at an average annual rate of 2.7 percent in 2020, the latest year of available detailed capital data. The growth of capital input in 2020 was 0.6 percentage point slower than the 3.3 percent growth in the previous year, the largest slowdown in capital growth since the Great Recession year of 2009, as the COVID-19 pandemic slowed production. (See table C.)
Capital input growth is the approximate sum of the contributions of different asset types. As in all years, intellectual property products and equipment are the largest contributors to capital input growth. In the pandemic recession year of 2020, the 0.6-percentage point slowdown in growth was primarily due to the equipment and inventories assets, as their contributions to capital input growth decelerated by 0.3 percentage point and 0.2 percentage point, respectively. The Great Recession years of 2008 and 2009 saw a similar trend, when capital input growth also slowed significantly in the equipment and inventories assets, but at a much larger magnitude. In 2009, the contribution of equipment assets slowed a full percentage point from 1.4 percentage points to 0.4 percentage point, while the contribution of inventories was a drag on capital growth, declining 0.4 percentage point.
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