I like to say that the formula for economic growth is simple: it\’s a mixture of more workers, improved human capital, increases in physical capital, and better technology–all operating in an economic environment that provides incentives for efficiency and innovation. Rebecca M. Blank fleshes out this framework in \”What Drives American Competitiveness?\” which was delivered as the 2015 Daniel Patrick Moynihan Lecture on Social Science and Public Policy and published in the Annals of the American Academy of Political and Social Science (January 2016, 663, pp. 8-30).
Blank carries out a \”growth decomposition\”–that is, looking at the actual rise in real GDP during the 45 years from 1970 to 2014, and attributing it to the following causes: \”GDP growth = growth in hours worked (25%) + growth in labor quality (10%) + capital deepening (39%) + TFP (26%).\” The phrase \”capital deepening\” refers to a higher amount of average physical capital per worker. \”TFP\” stands for \”total factor productivity,\” a measure of the growth of productivity over time.
How are these building blocks of economic growth expected to evolve in the next 10-20 years? The answer will imply how US growth will evolve.
For example, the total hours worked in the US economy was actually a little lower in 2014 than it was back in 2000. Blank writes:
\”Sheer growth in the number of workers has explained 25 percent of economic growth over the past 45 years. But the three big elements that drove this growth—immigration, the baby boom population bulge, and increases in women’s labor force involvement—are now either growing more slowly or moving in the opposite direction. The result is recent small declines in the work hours of the population. It is hard to see how work hours will grow substantially in the years ahead.\”
What about future trends in human capital? A standard method for estimating the amount of human capital is to look at education levels and job experience. Blank focuses on education levels. She points out that at the lower end of educational achievement: \”[H]igh school graduation has largely stalled out at around 88 percent of the population for both men and women. This means that a substantial share of the population is still entering the workforce without even a high school degree. Furthermore, a growing share of high school graduates hold GED degrees, which may not provide even the same skill level as a high school degree. From everything we know about the labor market, these young adults will face low wages and higher unemployment throughout their working lives, as job opportunities for the least skilled continue to deteriorate.\”
While the U.S. population has shown relatively slow growth in the share of the population with a college degree, other countries have made very rapid progress on this front in recent decades. As a result, while this country had one of the most educated populations in 1970, other countries are rapidly surpassing the United States in educational attainment. In 2011, the United States ranked fourteenth among the thirty-six OECD nations in the percentage of 25- to 34-year-olds with associate’s degrees or higher. Even more concerning, this percentage is virtually the same among 25- to 35-year-olds as it is among 55- to 64-year-olds in the United States, while virtually all other countries have seen substantial gains in higher education for the younger age group …