Productivity. What are we really measuring?

Productivity growth is probably the single most important indicator of an economy's health: it drives real incomes, inflation, interest rates, profits and share prices. Investors' belief that America's "productivity miracle" will continue helps to underpin higher share-price valuations there than in Europe and to support the financing of the country's huge current-account deficit. European economies, in contrast, are thought to be much less productive, thanks to their rigid labour markets (see article).

Economic commentators toss around the term "productivity growth" as if there were one widely agreed definition. There isn't. America's favourite measure is output per man-hour in the non-farm business sector. Since 1996, this has increased at an annual average rate of 3%, double the pace of the first half of the 1990s. Growth in GDP per man-hour across the whole economy has been more modest: 2.2% a year on average since 1996, roughly the same pace as in France and Britain but faster than in Germany and Italy. Still, it remains true that the growth in GDP per man-hour quickened in America after 1996, while it slowed in most European economies.

Forget the dismal science, economics sometimes seems more like black magic.