In the long run, productivity growth is (almost) all that matters. The contribution of additional capital per worker is modest, because the US already is capital rich. It's that diminishing returns thing. We're also highly educated, so there's little room for improvement there in the aggregate. Yes, lots of our young people are ill-served by their "compulsory" education experience, with low literacy and numeracy, and at best weak background in science and technology. But even if we somehow fix that overnight, it won't start affecting the labor force for a decade, because, well, it's 16 years of schooling for those who proceed to college, and 12 for others. This will provide only a very modest boost to growth because the biggest benefits come from job experience; better educated youth won't start out that much more product, even if later in their careers they prove to be. Population growth of course can add to the overall size of the economy, but not to per-capita income. So we're left with productivity growth.
...good employment news tomorrow, but bad productivity news today...
For my students I detail this logic through a Solow growth model, a simple framework that helps clarify how these pieces fit together. The bottom line: outside the short run (such as the recovery from our Great Recession) it's productivity. But today we have the latest numbers.
First, here's real output per hour of work. If that doesn't rise, it's hard for real wages to rise. There are many forces holding this back; our nature as a service economy is one of them. Nurses can only handle so many patients, particularly as the average patient is sicker and older, and hence more frail. Traffic moves no faster only average than 20 years ago, though better logistics systems have helped offset freight and package delivery, that's been a slow, cumulative rise and not a sharp jump in productivity. If we look at manufacturing, we see much the same thing. Yes, we're improving, but with lots of automation already, the marginal benefits now appear empirically to be modest.
Tomorrow I expect the latest employment release to show continued progress towards normalcy, in terms of overall employment and participation. There's still room to grow on that front, but with each month there's less growth to be had on that front. That's the good news, which can continue for a few more months. The bad news came out today: the continued decline in productivity growth. Hitting 4% growth isn't going to happen unless that trend is reversed, and that's bad news for the many Americans who were hoping a new administration would bring better jobs.
Oh, and that "almost" proviso about productivity: whether gains are widely shared among workers matters, too. But that's a different topic altogether.