Why Productivity Matters (And Why Everyone Is Talking About It Again)

Explains productivity, technology, labor, and long-term economic health

By David Thornton

If you've noticed economists suddenly getting excited about "productivity," you're not imagining things. It's become the economic buzzword of 2026, and for good reason, recent numbers suggest something important might be shifting in the American economy.

What Productivity Actually Means

Strip away the jargon and productivity is simple: it's how much output workers produce per hour. If a factory makes 100 widgets in an hour today versus 90 widgets last year with the same number of workers, productivity has increased. It sounds technical, but it's actually the most important number in economics because it determines whether living standards can improve over time.

US labor productivity surged 4.9 percent in the third quarter of 2025, marking the strongest pace in two years. Combined with second-quarter growth of 4.1 percent, productivity averaged 4.5 percent over six months, a dramatic acceleration that has economists paying attention.

Why This Number Determines Your Future

Productivity is the only sustainable way to raise living standards without triggering inflation. When workers produce more per hour, companies can afford to pay higher wages without raising prices. When productivity stagnates, wages can only rise if companies accept lower profits or pass costs to consumers through higher prices, neither of which lasts long.

Since 1960, US productivity has grown at roughly 2 percent annually. That seemingly modest pace means workers today are about 250 percent more productive than their 1960 counterparts. This improvement is why your grandparents' generation could afford a middle-class lifestyle on single incomes while today's dual-income households can access technologies and healthcare unimaginable decades ago.

During the 2010s, productivity growth slumped to just 1.2 percent annually, one of the slowest rates in seven decades. This stagnation helps explain why so many people felt like they were working harder but not getting ahead. The recent acceleration to 2.0 percent average growth in the current business cycle represents real progress, though economists caution it's too early to declare a permanent shift.

The Technology Question

Much of the current optimism centers on artificial intelligence. The IMF estimates that with proper implementation, AI could boost global productivity by up to 0.8 percentage points annually, potentially lifting global growth above pre-pandemic levels. For the United States specifically, massive investment in AI infrastructure data centers, advanced chips, and power systems contributed significantly to the upgraded 2026 growth forecast of 2.4 percent.

But there's a puzzle underneath these numbers. The recent productivity surge comes during what economists call a "no-hire economy." Over the past five months, job creation averaged just 44,000 monthly, the lowest since 2020. When companies maintain or increase output while hiring fewer workers, productivity mathematically increases. Whether this reflects genuine efficiency gains from technology or simply companies squeezing more from existing workers remains an open question.

The Risks Nobody Wants to Discuss

Productivity gains don't automatically benefit everyone equally. The IMF warns that roughly 40 percent of jobs globally will be impacted by AI either upgraded, eliminated, or transformed. In advanced economies, that figure rises to 60 percent. About one in ten job postings in developed countries now requires at least one new skill that wasn't necessary before.

Workers with in-demand skills will likely see productivity and wage gains. But middle-skilled jobs face being squeezed, meaning young people and the middle class could be hit hardest. 

Countries with strong digital infrastructure, skilled workforces, and robust regulatory frameworks will capture the largest benefits fastest. Others risk falling further behind.

There's also a valuation risk. If AI-driven productivity gains and corporate profits don't materialize as investors expect, it could spark a correction in high technology stock valuations, potentially triggering broader financial instability.

What It Means for You

In the short term, higher productivity gives the Federal Reserve more room to delay interest rate cuts. If the economy can grow faster without overheating, policymakers can keep rates higher for longer to ensure inflation truly returns to target.

In the long term, sustained productivity growth is the difference between stagnant living standards and genuine prosperity. It determines whether your children will live better than you do, whether healthcare becomes more affordable, and whether wages can rise without triggering inflation.

The recent productivity surge is encouraging but fragile. Whether it represents a genuine technological breakthrough or a temporary mathematical artifact of companies producing more with fewer workers remains uncertain. The answer will shape the economy for the next decade.