Thin profit margins limit employers' ability to give raises. Barclays Capital economist Blerina Uruci estimates annual wage gains, which at 2% have barely kept up with inflation, will pick up to a 3% pace this year as falling unemployment forces firms to pay more to attract a smaller pool of workers. But, she adds, pay raises would average 4% if productivity growth were normal.
Weak productivity also hampers the economy, which can grow only by adding workers or increasing each worker's output, says Doug Handler, chief U.S. economist at IHS Global Insight. With Baby Boomers retiring and the unemployment rate at a near-normal 5.7%, productivity gains must shoulder a bigger share of the economic growth burden, he says.
Ultimately, a less productive, slower-growing economy means less hiring.
Atkinson and Handler largely attribute the listless productivity advances to inadequate business investment. Annual business spending on equipment and software has averaged 5.4% to 5.8% of gross domestic product since 2010, below the pre-recession level of 6.1% in 2007, according to IHS and the Commerce Department.
Atkinson says corporate executives have become fixated on short-term profits that determine their annual bonuses. "We have turned into a society that is myopically focused on the short term," he says.
A report last week by the San Francisco Federal Reserve places more blame on a dearth of innovation since significant strides in information technology boosted efficiency in industries such as retail from the mid-1990s through 2003. Annual productivity growth exceeded 3% during that period.
"By the mid-2000's, the low-hanging fruit of IT-based innovation had been plucked," say report authors John Fernald and Bing Wang.
Atkinson points to federal policy decisions, saying Congress has severely cut back investment in research and development.
Handler expects productivity growth to rebound somewhat to 1.5% this year as the 3.1 million workers hired in 2014 become more proficient at their jobs.