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Productivity is the key to making real gains in the economy

The unemployment rate in Idaho has declined to 3.4 percent, near its historic low of 3.3 percent in 2007. The unemployment rate in Boise is just 2.5 percent.

All this is good news, right? Not necessarily.

When we are looking for economic growth, a larger percentage of the population working does not immediately imply a better standard of living. We can all work a lot more but not really live any better.

A fundamental principle of economics is that real economic growth comes from higher labor productivity. Like any business, the well-being of our economy depends on our ability to produce goods and services. When we are more proficient at what we do, we can live better.

Productivity gains, in turn, depend on how much capital we have. Capital includes both physical capital like computers and equipment, and human capital like education and skills.

In its most recent report, the U.S. Bureau of Labor Statistics said that labor productivity in the nonfarm business sector rose at an inflation-adjusted rate of only 1.2 percent. This is well below the U.S. economy’s long-run average annual rate of nearly 3 percent.

While jobs may be plentiful, to achieve true and lasting economic growth, we need increased private investment. Investment in equipment, software and property improvements increases worker productivity and our standard of living.

New hotels and new office buildings may be rising in Downtown Boise, but real economic gains will arrive when businesses invest more in their operations and productivity picks up.

The Bureau of Labor Statistics studied private business investment and found that from 1994 to 2004, private domestic investment grew at an annual rate of 5.3 percent, but dropped off to only a 0.7 annual rate in the 10 years that followed. In the same report, the bureau estimated that investment will bounce back to only 2.9 percent each year on average through 2024.

Economic theory and historical experience suggest that with this low level of business investment, we will see only slow improvement in labor productivity, and therefore only slow improvement in worker wages and our overall standard of living.

Something is holding back business investment.

Policy makers may tout all the new buildings going up around us, but they would do well to consider how best to incentivize existing businesses to invest more.

Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa.