Raising productivity is the key to growth

PARK SUN-YOUNG
The author is a professor of economics at Dongguk University.

The resilience of the U.S. economy regardless of the highest-ever interest rate hike in 40 years is surprising. Last year, the GDP grew by 2.5 percent. The unemployment rate is below 4 percent for the 24th consecutive month, a record in more than 50 years. That’s not all. Real wages for workers increased and wage disparity declined last year, while participation of women between the ages 25 and 54 in economic activities hit an all-time high at 77.8 percent.

These numbers evoke envy from Koreans. You can find some inspiration from the numbers. According to a Wall Street Journal report on February 8, America’s recent growth can be interpreted from three perspectives: improvement in productivity, the U.S. government’s fiscal spending, and the delay in the effect of higher interest rates due to fixed-rate debt.

First is the improved productivity. The private sector productivity, as measured by output per hour, has surged significantly since the first quarter of 2022, when the Federal Reserve began raising the benchmark rates. As a result, workers are increasingly moving to more productive jobs and getting paid more. Corporate investment has also recovered much faster than the 2007-2009 recession, now 10% higher than its pre-pandemic peak. If the benefits of artificial intelligence materialize, productivity growth will continue.

Second is Washington’s massive fiscal spending. Last year, the U.S. government raised its debt to 6.2% of the GDP. The economy continued to grow solidly despite high interest rates thanks to subsidies to eco-friendly businesses and stimuli packages.

Third, the effect of the interest rate increase is yet to hit the large corporations and homeowners who borrowed at a record-low fixed rate before the Fed’s rate hike.

The current boom can be a byproduct of the three factors. But what is the most important? Paul Krugman, the winner of the 2008 Nobel Prize for Economics, once famously said, “Productivity isn’t everything, but, in the long run, it is almost everything.”As of 2022, the hourly labor productivity of the U.S. is $74, Germany’s $68.60 and France’s $65.60. But Korea’s $43 is much less than them. As the population trend for the next 30 years is somewhat set, the only way Korea can benchmark is to increase productivity in the private sector.