Adriana D Kugler: Entrepreneurship and aggregate productivity

Thank you, Jon, and thank you for the opportunity to speak to you today. It is such a pleasure to be back in Miami, a city I have seen grow and become ever more dynamic over the decades, as I have come many times to visit my large extended family here ever since the 1980s.

As I discussed in my final speech of 2024, two positive supply shocks have significantly benefited the U.S. economy over the past two years and have also affected the conduct of monetary policy.

The first of these has been the surge in population over the past few years that has helped bring labor supply into balance with labor demand and, thus, also helped move inflation toward the Federal Open Market Committee's (FOMC) 2 percent goal. The other positive supply shock, which I outlined in my remarks in December, has been a step-up in aggregate productivity growth since 2020, which is an increase in the amount of economic output, across the economy, per hour worked or some other unit of labor. Although productivity growth, measured quarterly, can be quite volatile, over the past five years this acceleration is quite evident. While productivity grew by about 1.5 percent a year from 2005 to 2019, starting in 2020 it has grown about 2 percent a year. This difference may not look dramatic, but because of compounding year-over-year, the consequences of an additional 1/2 percentage point in growth over the past five years are significant for workers and the U.S. economy. When workers are more productive, it effectively means that businesses can produce more without needing to add workers, and that they can pay workers more without needing to raise prices. When they are more productive, it can also serve as an incentive for businesses to expand. Across the economy, higher productivity growth means that real wages and living standards for workers can rise faster without putting upward pressure on inflation.

And that is exactly what has been happening recently, a period when inflation has been falling while the economy is expanding. While fast growth in wages was one of the factors driving inflation in 2021 and 2022, most likely some of that increase was due to productivity growth and, hence, was not inflationary. If productivity continues to grow at an accelerated pace, it would support the FOMC's efforts to keep unemployment low and return inflation to a sustained level of 2 percent. For that reason, I would like to spend the balance of my remarks exploring some of the possible reasons why productivity has accelerated, and the prospects that this fortunate development will continue.