Question

An article in the Wall Street Journal discussing the Trump administration's goal of increasing the annual rate of growth in real GDP to 3 percent noted, "Two stubborn obstacles stand in his way. The work force isn't producing enough new workers, and the productivity of those working isn'\operatorname{tg} r o w i n g ~ f a s t ~ e n o u g h . " ~ B r i e f l y ~ e x p l a i n ~ w h y ~ t h e s e ~ two factors are "obstacles" to attaining a higher growth rate.

Short answer

The two factors are considered obstacles because a stagnant or shrinking workforce means there aren't enough hands to increase production and thus GDP, while low productivity growth means that workers aren't becoming more efficient in generating outputs, also constraining the increase in GDP.

Step-by-step solution

Understanding GDP growth

The first thing to understand is why these two factors are so important for GDP growth. GDP or Gross Domestic Product is the total value of goods and services produced in a country in a given period. The growth of GDP depends on two main factors, workforce growth and productivity growth. If there are more workers (workforce growth) and if each worker is more productive (productivity growth), GDP grows faster.

Lack of Workforce Growth

When the workforce doesn't grow fast enough, it can limit GDP growth. This is because GDP growth requires more workers to produce goods and services. If there aren't enough new workers entering the workforce due to factors like ageing population or a decreasing birth rate, then this leads to a shortage of labor, which can be a bottleneck for GDP growth. Thus, a slow-growing work force is an obstacle to faster GDP growth.

Low Productivity Growth

The productivity of a worker is defined as the amount of goods or services that a worker produces in a unit of time. If productivity is not increasing, it means that workers aren't getting more efficient, which in return leads to slower GDP growth. Factors that can affect productivity include technological advancements, education and skill level of workers, and infrastructure, among others. Hence, low productivity growth can limit the rate of increase in GDP, making it an obstacle to faster GDP growth.

Key concepts

Workforce Growth

One of the fundamental drivers behind a nation's economic expansion is workforce growth. This concept refers to the increase in the number of individuals available to work. There are several factors contributing to workforce growth, including natural population growth, immigration, and the assimilation of previously unrepresented groups into the labor market.

When the available labor pool expands, it theoretically provides more hands to produce goods and services, which in turn increases economic output. However, when workforce growth stagnates, this directly affects the country's potential to increase its output and GDP. A slowdown in workforce growth can occur due to an aging population, low birth rates, restrictive immigration policies, or economic disincentives that discourage people from working.

For instance, an aging population can lead to a higher number of retirees when compared to new entrants in the job market. This shift creates a labor shortage and pressures existing workers, potentially restricting economic expansion and innovation. Proactive policies and incentives to either boost the birth rate, attract skilled immigrants, or encourage participation from non-working cohorts can address these challenges.

Why Is Workforce Growth Crucial?

Without enough new workers, economic demand might outstrip the labor supply, leading to inflationary pressures and stagnating productivity. Companies may struggle to scale up operations, and the shortage of labor could drive up wages unsustainably, impacting business profitability and overall economic health.

Labor Productivity

Labor productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the number of hours worked to produce those goods and services. It's a crucial indicator of a country's economic health because improvements in productivity can lead to higher standards of living without requiring increases in work hours.

Labor productivity increases when businesses invest in technology, equipment, and employee skills, allowing workers to produce more efficiently. This concept reflects not only the hard work of the labor force but also the smart work—doing things more intelligently and leveraging technology.

Productivity can stagnate when there is a lack of innovation or investment in capital goods, when education and training do not keep pace with technological advancements, or when economic policies do not support business growth and efficiency. For example, if outdated technology is used, or if workers lack the necessary skills to operate new, sophisticated machinery, productivity can suffer, leading to a slow growth rate for the overall economy.

Addressing Productivity Issues

To ramp up labor productivity, initiatives such as continuous education and training programs, investment in research and development, and policies that encourage the adoption of innovative technologies and practices are essential. The modernization of infrastructure also greatly contributes to productivity as it facilitates smoother operations and communications. Streamlining productivity is not just about working harder but also about working smarter.

Real GDP Rate of Growth

The real GDP rate of growth is a macroeconomic metric that represents the increase in the value of all goods and services produced in an economy, adjusted for price changes or inflation, over a specific period. It is one of the most prominent indicators of a country's economic health and performance. A stable or increasing real GDP growth rate suggests that an economy is thriving, while a declining rate might indicate economic troubles.

A higher rate of growth in real GDP implies that the economy is expanding and potentially creating more opportunities for businesses and individuals. It also suggests improvements in the standard of living, as more monetary resources become available for government and private sector investments in public services, infrastructure, innovation, and consumption.

However, achieving and sustaining a high real GDP growth rate can be challenging. Workforce growth and labor productivity, as mentioned previously, are two significant obstacles that need to be tackled. The absence of either can significantly hamper the rate at which an economy can grow. If the workforce isn't growing, even at high levels of productivity, the economy may not expand rapidly due to the limited number of workers. Conversely, if productivity growth is low, even a growing workforce might not be enough to drive substantial economic growth.

Understanding the Economics

A multifaceted approach that includes encouraging workforce participation, fostering an environment conducive to productivity enhancements, and effectively utilizing technology can lead to sustainable real GDP growth. Policy measures targeting education, training, health, and migration can support the workforce, while investments in technology and infrastructure can boost productivity, collectively fueling a steady and robust growth in real GDP.