Imagine a world where every hour of work yields more value, pushing economies forward and lifting lives higher.

This is the essence of labor productivity, a measure that defines our economic destiny and holds the key to sustainable prosperity.

As Paul Krugman famously noted, productivity isn't everything, but in the long run, it is almost everything, highlighting its critical role in shaping our collective future.

What Is Labor Productivity and Why Does It Matter?

Labor productivity quantifies the output produced per hour of work, serving as a fundamental gauge of economic efficiency.

It enables societies to achieve more with less, fostering growth without exhausting resources or stoking inflation.

The benefits of boosting productivity are profound and far-reaching.

• It allows firms to raise worker pay without increasing prices, promoting real wage growth.
• Productivity drives faster economic expansion and helps keep inflation in check.
• Businesses enjoy greater profits, while economies grow sustainably.

Ultimately, enhancing productivity is the only sustainable path to raising living standards, making it a cornerstone of modern economics.

The Recent Surge in US Productivity Trends

In recent years, the United States has witnessed a remarkable uptick in productivity growth, signaling a potential shift from decades of stagnation.

This resurgence offers hope and practical insights for policymakers and businesses alike.

• In 2023, labor productivity grew by 2.7%, outpacing the 1.5% annual average since 2004.
• 2024 saw a full-year growth of 2.7%, with 2.4% in the fourth quarter, marking the highest rate in 15 years excluding pandemic anomalies.
• By Q2 2025, productivity increased by 2.5%, nearing the pace of the 1990s boom.

This recovery is stark against the backdrop of a nearly twenty-year decline, where growth averaged just 1.5% from 2005 to 2019.

To put this in perspective, here is a table summarizing key productivity metrics:

These numbers underscore a reversal in declining dynamism that could herald a new era of economic vitality.

Drivers Behind the Productivity Upswing

Several factors have fueled this recent productivity growth, each offering lessons for sustaining momentum.

Business dynamism and entrepreneurship have played a pivotal role.

• New business applications through Q1 2024 exceeded 2019 levels by 54%, strongly linked to job creation and innovation.
• This surge marks a significant shift from decades of dwindling entrepreneurial activity.

Technology and innovation are also key contributors.

• Tech sectors contributed 0.3-0.4 percentage points to the acceleration, with Total Factor Productivity rebounding sharply.
• Artificial Intelligence is expected to boost GDP significantly, though its full potential requires broader accessibility.

The services sector has outperformed post-pandemic, with information and business services leading in new applications.

However, growth is uneven across industries, with disparities more pronounced since 2020, yet shifts to lower-productivity sectors have had minimal impact on aggregates.

Future Outlook: Challenges and Opportunities

Looking ahead, projections suggest moderate growth, but several headwinds and opportunities will shape the trajectory.

Goldman Sachs Research projects an average of 1.7% productivity growth through 2029, rising to 1.9% in the early 2030s.

Challenges loom that could hinder progress.

• Higher tariffs may drag on output by shifting resources to less productive industries.
• Frictional unemployment could rise with AI adoption, while slowing TFP growth threatens long-term gains.
• Another decade of weak productivity could erode living standards and stability.

On the flip side, opportunities abound for proactive measures.

• Deregulation and investment incentives can spur capital spending and efficiency.
• Greater immigration can offset workforce shrinkage, and stronger competition rules may foster innovation.
• Ensuring AI reaches all sectors and company sizes is crucial for unlocking its economic potential.

The Productivity-Pay Gap: A Critical Economic Issue

A stark reality shadows productivity gains: the growing wedge between productivity and pay.

From Q4 1979 to Q2 2025, productivity increased by 87.3%, while hourly pay rose only 32.7%, meaning productivity grew 2.7 times as much as pay.

This gap reflects policies that suppressed wage growth, making economic growth both slower and more unequal.

Addressing this disparity is essential for ensuring that productivity benefits translate into shared prosperity.

Labor Market Composition and Unit Labor Costs

Labor market shifts have nuanced effects on productivity, especially during economic downturns.

During crises like the Great Recession, job losses among less educated workers raised the average skill level, temporarily boosting productivity.

Pre-2020, employment shifts to lower-productivity sectors negatively impacted growth, but since 2020, such effects have been minimal.

Unit labor costs remain a concern, growing 1.0% in Q2 2025 and averaging 2% annually since 2011, even with strong productivity gains.

This underscores the need for balanced growth that controls costs while enhancing output.

Policy Pathways for Sustained Productivity Growth

Policymakers have a crucial role in turning recent gains into a lasting rise, fostering an environment where innovation thrives.

Key actions can make a significant difference.

• Support conditions for new business creation and entrepreneurship to maintain dynamism.
• Foster innovation in smaller, younger enterprises that use R&D resources more efficiently.
• Implement stronger competition rules to encourage diverse economic participation.

Uncertainties persist, such as whether the TFP rebound is temporary or the start of a new trend.

But by embracing these strategies, we can build a future where productivity powers inclusive economic growth, lifting everyone higher.

Remember, the journey toward greater productivity is not just about numbers; it's about creating a world where hard work yields lasting rewards for all.