WASHINGTON — American workers are producing more output per hour than at any point in recent years, yet job creation has slowed to levels not seen since the early days of the pandemic recovery, creating an economic puzzle that challenges traditional assumptions about the relationship between productivity and employment growth.

Labor productivity grew at an annual rate of 2.4 percent in the second quarter of 2024, according to Bureau of Labor Statistics data, while three-month average payroll growth has decelerated to 173,000 jobs per month through November. The divergence marks a departure from historical patterns, where strong productivity gains typically accompanied robust job creation as expanding businesses required more workers to meet growing demand.

The Numbers Tell an Unusual Story

Total factor productivity, which measures how efficiently the economy uses both labor and capital, increased 1.3 percent in 2024 following a 1.4 percent gain in 2023. These figures represent a notable improvement over the sluggish 1.1 percent average annual productivity growth recorded from 2010 to 2019, which was the slowest decade in American economic history.

Yet the improving productivity numbers coincide with clear evidence of labor market deceleration. The economy added 227,000 jobs in November, rebounding from October's disrupted report, but the second half of 2024 averaged just 137,000 monthly payroll gains. That pace falls below the 2019 average of approximately 160,000 and represents a significant decline from the overheated 2021-2022 period.

The unemployment rate ticked up to 4.2 percent in November from 4.1 percent in October, returning to levels last seen in mid-2021. While still historically low, the direction of change suggests loosening labor market conditions even as workers maintain and improve their output efficiency.

Manufacturing Sector Shows Steepest Productivity Decline

The productivity story becomes more complex when examining individual sectors. Manufacturing, historically a productivity leader and home to the majority of research and development spending, has experienced a mysterious productivity collapse that contradicts the broader national trend.

New York Federal Reserve research shows manufacturing productivity declined at an average annual rate of 0.5 percent from 2010 to 2022, a dramatic reversal from the 3.4 percent annual gains recorded between 1987 and 2007. The manufacturing sector's productivity level now sits 6 percent below its first quarter 2011 peak, according to BLS data.

The manufacturing slowdown appears across both fast-growing and slow-growing industries within the sector, and persists even among the largest, most technologically sophisticated firms in each industry. This widespread weakness suggests systemic factors rather than isolated problems in specific industries.

Manufacturing productivity did increase 3.1 percent in the second quarter of 2024, offering hope for reversal. However, this single-quarter improvement comes against a backdrop of more than a decade of disappointing performance and may prove temporary.

Post-Pandemic Dynamics Shift Worker Productivity

The pandemic-era shift to remote work appears to have played a significant role in recent productivity improvements, though the effects remain debated. IMF research examining industry-level data found that eight of the top 10 industries with fastest productivity growth since the pandemic are those where jobs can be performed remotely.

Industries with predominantly teleworkable positions saw their productivity lifted more than 6 percent above pre-pandemic levels by the first quarter of 2024. However, San Francisco Federal Reserve analysis concluded that industries with more work-from-home occupations did not see systematically greater productivity gains than other industries after 2020, suggesting the relationship is less clear than initial data indicated.

The pandemic also triggered unprecedented labor market churn that may have contributed to productivity improvements through better job matching. Business applications surged in both 2020 and 2021, with applications from likely employers particularly prominent, according to Census Bureau statistics. This entrepreneurial wave potentially reallocated workers to more productive roles.

Job-to-job transitions, which typically indicate workers moving to better opportunities, rose sharply during 2021 and 2022 before moderating. The quits rate peaked at 3 percent in late 2021 but has since returned to pre-pandemic levels around 2.1 percent as of October 2024.

Artificial Intelligence Impact Remains Uncertain

The debate over artificial intelligence's contribution to productivity has intensified as adoption rates climb. Census Bureau data shows AI use increased across most sectors since 2023, with 23 percent of information sector companies currently using AI as of October 2024, and 31 percent anticipating adoption by April 2025.

MIT economist Daron Acemoglu projects AI will boost total factor productivity by just 0.7 percent over the next decade, a figure he characterizes as non-trivial but far below revolutionary predictions. Goldman Sachs offers a more optimistic forecast, though still substantially below the most hyperbolic claims about AI's transformative potential.

Kansas City Federal Reserve research suggests recent productivity gains likely reflect both cyclical factors related to the business cycle and structural improvements including remote work and early AI adoption. However, distinguishing between temporary cyclical effects and durable structural improvements remains difficult with just a few years of post-pandemic data.

Why the Job Growth-Productivity Link Broke Down

Several factors explain why strong productivity growth has not translated into robust job creation. First, businesses facing higher interest rates have become more cautious about expanding payrolls, preferring to increase output from existing staff rather than adding workers and the fixed costs they entail.

Second, labor force participation constraints have forced companies to focus on efficiency improvements. The prime-age labor force participation rate stands at 83.5 percent as of October, near multi-decade highs, suggesting limited additional workers are available even if businesses wanted to hire aggressively.

Third, the composition of productivity gains matters. When productivity improvements come from better matching of workers to jobs or adoption of labor-saving technologies, less hiring is needed to generate the same output. Capital deepening, where businesses invest in more productive equipment per worker, can substitute for rather than complement employment growth.

Wage growth provides additional context. Average hourly earnings increased 4 percent on a year-over-year basis in November, down from pandemic-era peaks above 5 percent but still elevated compared to the Fed's 2 percent inflation target. Elevated wage growth combined with slowing hiring suggests employers are retaining and compensating existing workers well while exercising caution about new hires.

Temporary or Permanent Shift

Whether the current productivity-employment divergence represents a temporary cyclical phenomenon or a more permanent structural shift remains the critical question facing policymakers and business leaders.

Historical precedent suggests caution about declaring a new paradigm. During the Great Recession of 2007-2009, labor productivity rose sharply above its pre-recession trend before gradually returning to trend over several years. A similar pattern occurred during the pandemic, with productivity surging in 2020 then retreating toward its slow pre-pandemic trajectory.

Conference Board CEO confidence surveys show the highest share of chief executives since 2023 expecting employment expansion over the subsequent 12 months, suggesting business leaders anticipate hiring will strengthen. Job openings rebounded in October, rising 370,000, with particularly strong demand among small businesses.

However, permanent job losses increased for the second consecutive month in November, a warning sign that unemployment could rise in 2025 if layoffs begin accelerating without a corresponding pickup in hiring. The share of workers unemployed for 27 weeks or more has climbed to 23 percent of total unemployed, comparable to 2017 levels.

Federal Reserve officials face difficult decisions about how to interpret mixed signals from productivity and employment data. Strong productivity supports higher real wages and living standards without generating inflationary pressure, potentially allowing the Fed to maintain lower interest rates. However, slowing job growth that persists could signal economic weakness requiring policy intervention.

For American workers and families, the productivity paradox creates winners and losers. Employed workers at productive companies benefit from wage gains supported by efficiency improvements. But those seeking new employment face a challenging environment with fewer job openings and longer unemployment durations.

The ultimate resolution of this paradox will likely require several more quarters of data to distinguish cyclical noise from genuine structural change in the American economy's fundamental relationships between productivity, employment and growth.