Key Economic Indicators of U.S. Competitiveness

S&E and the technological innovations that emerge from R&D activities enable high-wage nations such as the United States to compete in today’s highly competitive global marketplace. Many of the innovative new products found around the world, many of the inventions and manufacturing process innovations that improve worker productivity, and many of the transformative innovations that create not just new companies but new industries can be traced back to earlier national investments in S&E and R&D. Business application and marketing of these innovations make large contributions to national economic growth and support U.S. economic competitiveness in the marketplace at home and abroad (Okubo et al. 2006).[3]

An international standard used to judge a nation’s competitiveness rests on the ability of its industries to produce goods that sell in the marketplace while simultaneously maintaining, if not improving, the standard of living for its citizens (OECD 1996). Three macroeconomic indicators that help to measure this standard of national competitiveness are economic growth, standard of living, and productivity. Trends in these indicators for the United States are presented alongside those for the EU and Japan, which also rely on R&D and other S&E investments to support national competitiveness.

Trends in National Economic Growth, Standard of Living, and Labor Productivity

National Economic Growth

The U.S. economy, the largest of any nation, continues to be one of the fastest growing compared with other large, advanced economies (figure 6-1figure.; appendix table 6-1Excel.). With the expansion of country membership, the EU has become an economic area slightly larger than the United States, $13.0 trillion versus $12.4 trillion on a purchasing power parity basis in 2005. (Purchasing power parity (PPP) is the exchange rate required to purchase an equivalent market basket of goods.) Both economies measured more than three times larger than that of Japan. Breaking down the past 15 years into three 5-year periods, the U.S. economy grew faster than either the EU or Japan during each of the three periods. U.S. gross domestic product (GDP) grew at an average annual rate of 3.2% from 1991 to 1995, by 4.2% from 1996 to 2000, and by 2.8% from 2001 to 2005 (figure 6-1). During 2005, the most recent year for which these internationally comparable data are available, U.S. GDP grew by 3.2%.

Standard of Living

Faster growth of the U.S. economy, however, is due partially to more rapid population growth in the United States compared with the other two economies. Normalizing the value of all national economic activity (GDP) for population size provides a widely recognized measure of the national standard of living. During the same 15-year period discussed previously (1991–2005), U.S. GDP per capita increased each year except 2001, rising from $31,312 (inflation adjusted to PPP 2005 dollars) in 1991 to $41,824 in 2005 (figure 6-2figure. ; appendix table 6-1Excel.). GDP per capita in the EU was generally 25%–30% lower (in inflation adjusted to PPP dollars) than U.S. GDP per capita but followed a similar upward trend; 1993 was the EU’s single year of declining GDP per capita. By comparison, during the same time period, Japan’s standard of living grew much more slowly, experiencing several years of decline.[4]

Productivity of the United States and Other Advanced Economies

The high and rising standard of living enjoyed by the three advanced economies, the United States, the EU, and Japan, is influenced by the efficiency with which their resources (labor and capital) are employed, measured by labor or multifactor productivity. Labor and multifactor productivity are the change in GDP per unit of labor and combined unit of labor and capital, respectively.

Process innovations and the application of new capital equipment in the manufacturing process help to raise labor’s productivity, allowing high-wage nations such as the United States to compete successfully in the global marketplace.

Labor productivity of the United States has exceeded that of the EU and Japan for at least several decades (figure 6-3figure.; appendix table 6-2Excel.). Growth in U.S. productivity lagged behind that of the EU and Japan in the early 1990s, but rebounded in the latter half of the 1990s. U.S. productivity growth during this period has been attributed to the widespread diffusion of information technology (IT) throughout the economy.[5] The EU’s and Japan’s growth rates in productivity fell during the 1995–2000 period, and the EU’s rate continued to decline from 2000 to 2005. As a result, the gaps between the levels of labor productivity of the United States, the EU, and Japan have widened over the past decade.

International Comparisons of Labor Compensation

Productivity growth can directly affect the level and growth of wages in a country. Existing data allow only limited international comparison. An international indicator of relative wages across economies is compensation costs (direct wages and benefits) for production workers in manufacturing, which measure whether gains in productivity and per capita GDP have been accompanied by an increase in labor compensation. These compensation data do not fully take into account cost-of-living differences across countries, however.

U.S. workers have enjoyed steady gains in compensation during the past decade and a half, coinciding with gains in U.S. productivity (figure 6-4figure.; appendix table 6-3Excel.). The trend in compensation in the EU and Japan has been more volatile (in part reflecting fluctuations in exchange rates), but their levels are comparable to that of the United States. EU production workers generally fared better during this period than production workers in the United States and Japan, although this measurement does not adjust for differences in PPP within the three economies.

Data on wages and benefits for U.S. workers employed in broad sectors of the economy show that productivity growth has been accompanied by an increase in real wages and benefits paid to U.S. workers in private industry (table 6-1table.). Between 1989 and 2005, compensation for U.S. workers in the goods sector (manufacturing, construction, mining, and utilities) and the services sector (financial, retail, communications, and business) grew at 0.7% on an average annual basis adjusted for inflation. Compensation grew faster for white collar workers compared with blue collar workers in both sectors (table 6-1).

Judging from the measures discussed above, the United States continues to be highly competitive in the global marketplace. The U.S. economy continues to expand, finding demand for its products and services while maintaining relatively high compensation for U.S. workers and rising GDP per capita for its citizens.

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Rising Competitiveness of China and India

Economic growth in China and India has been rapid in recent years, and these two countries have increased their global market share, trade, and investment in many industries. Productivity and per capita income growth of these two countries, particularly China, appear to have been much more rapid in recent years than that of the United States and other advanced economies (table 6-2table.). Despite these apparently rapid gains, their absolute level of productivity and per capita income remain far lower than that of industrialized countries (see sidebar, "Measuring National Competitiveness of China and India").

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Notes

[3] The Bureau of Economic Analysis (BEA) estimates that treating R&D as an investment increased the level of current-dollar GDP by an average of 2.5% per year during the period 1959 to 2002 (Okubo et al. 2006). The BEA estimate measures the direct impact of R&D and does not include the indirect (spillover) impact of R&D.

[4] GDP per capita does not reveal anything about comparative distribution of income across countries, for which data are not readily available.

[5] Extensive literature exists on the impact of IT on U.S. economic growth in the mid-1990s. For example, see Stiroh K 2001. What drives productivity growth? Economic Policy Review 7(1):39–59; http://www.newyorkfed.org/research/epr/01v07n1/0103stir.html. Accessed 26 June 2007.

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