Explaining the Slowdown

Studies of productivity point to a number of unfavorable factors converging on the American economy at about the same time, including the following:

• Beginning in the 970 s, environmental regulations required that firms spend substantial sums 011 plant and operations reduce pollution and Over the long run, real wages’tend to move with trends in labor productivity. After the productivity slowdown in 1973, real wages stagnated. (Source: U.S. Department of Labor. Productivity is for the U.S. business sector; nominal compensation is deflated using the consumer price index.) improve worker and consumer safety, yet these improvements did not show up as measured out: put increases. One of the most dramatic cases was productivity in nuclear-power plants. in which regulations increased costs so sharply that they became uneconomical to build and sometimes even to run.

The increase in ‘prices in the 1970 sled firms to substitute other inputs (labor and capital) for energy. As a result. the productivity of labor and capital declined relative to earlier periods. • Labor economists believe that a deterioration in labor quality (or perhaps a slowdown the increase in quality) was a contributor to slowdown. The important indicators here include a ‘deterioration in test scores of American students and a sharp increase in the share of low-skilled immigrants in the workforce.