An analysis of real GDP per capita reveals that productivity is the key driver behind improvements in living standards over time. As the only component of GDP per capita that can theoretically grow without limit, productivity growth is crucial, especially with potential advancements from technologies like artificial intelligence (AI).
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Historically, living standards in the U.S. have increased at a steady rate of 1.9 percent annually over the past 150 years, a phenomenon first noted by Stanford economist Charles Jones. While factors such as labor productivity, employment rates, and labor force participation rates can contribute to changes in living standards, productivity remains the primary determinant in the long run.
Real GDP per capita represents how much of the total output of goods and services produced in a year could be allocated to each U.S. resident if divided equally. Recent trends show that, since 1870, the average annual growth rate of GDP per capita has held consistently around 1.9 percent, even through various economic shocks and significant technological advances.
GDP per capita can increase due to various factors: higher labor productivity, longer work weeks, a higher employment rate, or a larger share of the working-age population. However, most of these factors are constrained, whereas productivity can grow indefinitely, emphasizing its central role in enhancing living standards.
Looking at historical trends, periods of rapid productivity growth, such as from 1949 to 1973, saw living standards rise at around 2.5 percent annually. However, there has been a notable slowdown in productivity growth since 1973, affecting overall economic expansion. After a brief recovery in the late 1990s, growth again decelerated around the Global Financial Crisis in 2007, although there are indications of a recent pick-up.
Moreover, despite changes in the working-age population and participation rates, productivity growth has remained the most significant contributor to increases in living standards across different eras, reinforcing the notion that any technological innovation, such as AI, that enhances productivity will have a lasting impact on economic growth.
Research by economists, including Robert Solow, has highlighted the importance of productivity, showing that it has consistently anchored living standards over both short and long periods, even through major economic disruptions. This long-term perspective solidifies the view that sustained increases in labor productivity are essential for raising living standards in the United States.