In thinking about the medium-term prospects for the economy, I find it useful to consider these two factors separately. Output per hour, or productivity, is the secret sauce to U.S. economic growth and to rising living standards, but I fear that the recipe may have lost some key ingredients.
Growth in labor productivity arises when a firm's workers use more and better physical capital, or when firms become more efficient at converting inputs into output. Innovation plays a key role, both because it directly boosts efficiency and because firms' decisions to invest in physical capital tend to depend on the underlying pace of innovation.