Key facts
- US labor productivity grew by 2.7% in 2023.
- This growth rate is the highest since the 1990s and surpasses the 1.5% average annual growth from 2004 to 2022.
- A significant increase in new business creation since 2020 is a primary factor behind the productivity surge.
- The rise in new businesses reverses a long-term trend of declining business dynamism in the U.S.
U.S. labor productivity experienced a notable resurgence in 2023, growing at a 2.7% rate, marking the strongest performance in decades and interrupting a nearly twenty-year period of slower growth. This recent surge nearly matches the 2.9% pace seen during the productivity boom of the 1990s and significantly outpaces the 1.5% annual average growth recorded since 2004.
While discussions often center on the impact of remote work and generative AI on productivity, economists suggest that the primary driver of this recent upswing is a renewed surge in new-business creation since 2020. This trend reverses a decades-long decline in business dynamism in the United States, which had been linked to a significant drag on aggregate productivity.
Productivity growth is crucial for economic expansion, allowing for increased output with the same or fewer inputs. Historically, strong productivity growth has been closely tied to real wage growth and rising living standards, as firms can afford to increase pay without necessarily raising prices. The period from the Civil War to the 1970s, often termed the "special century," saw productivity growth averaging 2.7% annually, driven by transformative innovations like electricity and the automobile. Following this, growth slowed, then accelerated with the internet revolution from 1994 to 2004, before decelerating again until 2022.
The increase in new business creation, characterized by the entry and growth of young firms, is a significant factor. These dynamic young companies introduce innovations and foster competition, which can drive less productive firms out of the market. The U.S. had seen a steady decline in the share of new businesses, falling from 14% in 1978 to 9% in 2020, a trend that economists estimate cost the economy 3.1% in aggregate productivity since 1980. The reversal of this trend since 2020, with 5.4 million new business applications filed, offers a potential pathway to sustained productivity growth.