Causes of Stagnation

There are several reasons why actual or potential Real GDP growth might slow down. The table below shows evidence on some of these possibilities. If both potential and actual growth have slowed to about the same extent, then perhaps we do not have a stagnation problem. (The Table is derived from data from the Bureau of Labor Statistics, Penn World Tables, The Economic Report of the President, and the U. S. Census Bureau).

Population growth might slow

Population growth increases both the demand for goods and services and the supply of labor to produce them, so slower population growth would mean slower potential economic growth. American population growth has slowed to some extent.

Fewer people might choose to work

The proportion of the population who choose to work is called the "rate of labor force participation." A decrease in the rate of labor force participation would slow the potential growth of output, while an increase in the rate of labor force participation would increase it. The American rate of labor force participation has tended to increase in the last few decades, to some extend offsetting the slowing of population growth.

The growth of labor productivity might slow

One of the most important sources of economic growth is the increase in output per worker. Labor productivity is output per unit of labor. If this growth of labor productivity is slower, the growth of total output would also be slower. Productivity growth itself might be stagnant -- that is, less than its own potential -- so it is not clear whether a decrease in productivity growth would be associated with stagnation or not. If productivity growth is itself below potential, we would see that as stagnation, but if potential and actual productivity growth have decreased about the same, then we would not see that as stagnation.

Some Data