There's little doubt that U.S. productivity is on a roll. Despite the recent recession, output per hour in the nonfarm business sector has continued to forge ahead. Most economic gurus now agree that the productivity gains of the late 1990s reflect a long-term structural improvement, based on investment in information technology and other increases in corporate efficiency.
Nevertheless, one little-noticed factor contributing to productivity growth will likely lose steam in coming years. That's the marked movement of workers from the ranks of the self-employed to payroll jobs.
Economist Mark Zandi of Economy.com Inc. observes that the self-employed work force has fallen from its 1997 peak of 9.3 million workers to nearly 8.2 million, cutting its share of total employment by a full percentage point, to around 6%. Significantly, declines in self-employment in recent years have almost invariably been accompanied by rises in productivity growth (chart).
Much of this trend, suggests Zandi, reflects the failure of mom-and-pop retailers pummeled by the success of national chains. In particular, huge retailers such as Wal-Mart Stores (WMT), Target (TGT), and Home Depot (HD), which benefit from sophisticated inventory and logistics techniques and economies of scale, have been displacing local proprietors around the nation. Nationwide restaurant, video-store, and even homebuilding companies have had similar impacts.
The upshot has been both falling self-employment and a surge in retail productivity. According to a McKinsey Global Institute study, retailing was one of six industries that accounted for almost all of the nation's productivity jump in the last half of the 1990s.
The decline in small retail outlets has enhanced the productivity numbers in another way. While small owners tend to hide some of their sales to avoid taxes, big national retailers have an incentive to report all sales to impress investors. That tends to boost measured retail output and productivity.
Sooner or later, of course, the retailing shift will play itself out. Indeed, with the big boys already in most geographical areas, "the proverbial low-hanging productivity fruit may have already been picked," says Zandi. If the ranks of the self-employed were to stop declining, he figures annual productivity growth could slow by 0.15 percentage point--not a big number, but enough to dim a bit of the New Economy's luster. It's a riddle that economists continue to ponder: Why did consumption stay so strong during last year's recession? And why do households keep spending in the face of slowing income gains?
One answer, says a report by economists Gail Fosler and Lynn Franco of the Conference Board, is that "the U.S. consumer sector benefits from underlying demographic and income trends that make it a formidable economic force in all but the most adverse circumstances," such as deep recession, high inflation, or severe setbacks in confidence.
In particular, the authors point to the baby boom generation, still the strongest demographic force in the American consumer market. Households headed by older working Americans-- those 45 to 64--posted the fastest growth from 1994 to 2002, and these enjoy far higher wealth and income than other age groups.
What's more, these relatively affluent middle-aged households are still growing rapidly. By the end of the decade, the 45-to-64 group will account for some 40% of U.S. households, up from 30% in 1994 and 35% today. That'll help boost the number of upscale households. By 2010, Fosler and Franco estimate, some 47% of households will have incomes above $50,000. Indeed those with incomes of at least $100,000 are projected to rise by 38%, to 20 million.
In sum, the aging of the baby boomers promises to support underlying consumption growth through the end of the decade. And despite the continuing emphasis on marketing to youth, it will be middle-aged households who account for a rising share of outlays. According to the life-cycle theory of consumption, people spend less than they earn during their working lives to accumulate savings for consumption during retirement. They then liquidate their savings in old age, using their wealth to supplement pension and other income.
If that description came close to characterizing the behavior of older Japanese households, the outlook for consumer spending would improve. In a few years, a fifth of Japan's population will be over 65, and a quarter will be over 60. By 2020, the projected shares are 28% and 34%, respectively.
Unfortunately, Japan's seniors are hardly big spenders. Hiromichi Mutoh of the Japan Center for Economic Research notes in a recent article that the elderly spend only 10% to 16% more than their annual incomes. At that rate, he figures it would take 56 to 89 years to liquidate the average financial assets of roughly 25 million yen ($200,000 at recent exchange rates) held by households headed by persons 65 and older.
One way to spur more spending by old folks, suggests Mutoh, would be to allay their fears about rising medical costs by boosting government outlays for health care, including the expansion of public and private nursing homes. Another would be to eliminate consumption taxes for seniors and give tax breaks to companies that provide services for the elderly.
With Japan's personal savings rate running around 28%, getting seniors to spend more won't solve the nation's consumption woes, says Mutoh. But it could at least give household spending a much-needed kick start.