September 08, 2003

Boggling the Mind

I tried to get Larry Meyer to put a number on his current estimate of trend productivity growth: he declined. I find myself in a similar situation: the productivity numbers through the recession and into the job-loss recovery are simply mind-boggling--even if they are substantially overstated for any of the host of possible suspect reasons, they are still mind-boggling:

WSJ.com - Payroll Slump Has Economists Rethinking Ideas on Job Creation: Adecco, the temporary-employment company, is an example. Its U.S. revenue rose 6% in the second quarter from the year earlier, but during the same period it trimmed its payrolls 3% to about 3,200. Mr. Lyons said that was possible in part because of investments in technology that have allowed the company to train workers more efficiently.

For the nation as a whole, worker productivity grew at an annual rate of 6.8% during the second quarter. Forecasters say it is on track to grow at a rate of nearly 7% in the third quarter. This is much faster than the 2% to 2.5% productivity growth rate that many economists believe is the nation's longer-term trend.

The burst has some economists beginning to wonder if the nation's productivity potential is higher than has been believed. If this is the case, it would help explain why the job market continues to sputter even as growth accelerates. However, many economists agree it would also mean greater prosperity for most Americans in the long-run, because productivity supports higher profits for businesses and higher wages for workers.

"The numbers that we're seeing suggest [productivity growth] could be so much higher that it just boggles the mind," said Laurence Meyer, a former Federal Reserve Board governor and co-founder of Macroeconomic Advisers...

Posted by DeLong at September 8, 2003 06:52 AM | TrackBack

Comments

"However, many economists agree it would also mean greater prosperity for most Americans in the long-run, because productivity supports higher profits for businesses and higher wages for workers."

While it will certainly lead to greater prosperity in general, the current trend is that the prosperity will be distributed unevenly, even unfairly. Those who remain employed throughout the next 10 years should do well, and so should those who own lots of stock or real estate.

In the current climate, I don't see the benefits of greater productivity reaching the vast pool of the underemployed or those forced into unemployment by those same productivity gains.

Posted by: Eric H on September 8, 2003 07:20 AM

Usually when numbers seem too good to be true they are not true. A detailed analysis of productivity gains by sector should reveal if productivity increases are across the board or if some sectors are responsible for much of the gains. Then pricing and workforce structure need to be studied in detail to understand where the productivity has increased.

It is clear in the housing industry, that it takes almost as many workers to build a house today as 5 years ago. However, due to the housing bubble, prices may be 50% higher or more. Because interest rates were 30% lower (or more) the cost of the house to the buyer (interest plus principal) is not much greater.

As measured, there is an increase in productivity ($ output / worker hour) that has more to do with pricing than producing more items per worker.

Similarly, a company that replaces domestic tech workers with a contract to a foreign company will decrease the number of workers on paper. The foreign workers won't appear as labor on the bottom line, but as a contract expense. If the cost of the contract is less than the salaries, then productivity, ($ output / per worker) would increase because the number of workers have decreased on paper. In actuality, the number of foreign workers may be the same or greater, but they are not counted.

Another example is steel parts manufacturing as brought out in the Robert Novak column today. The Bush administration steel tariffs are hurting the auto parts manufacturing industry. Increasingly, auto parts manufacturing is shifting to countries that can buy steel at global prices instead of the US artificially high prices. The auto companies can pay the same price for the part from a foreign supplier. The cost of the part cancels as input and output. The price of the auto stays the same. However, fewer US workers are involved in the production of the car because the US parts producers are out of the loop. Productivity overall increases in terms of US workers, even though the same number or more foreign workers are involved. Those workers don't count so productivity increases on paper.

Greater prosperity only comes if US workers are trained to take higher paying jobs.

Posted by: bakho on September 8, 2003 07:51 AM

We believe we work most efficiently and carefully, but we add our work hours to 70 a week. We explained before that we never admit to working more than 35 hours and believe most competitive colleagues mask their hours at work.

We do not have to put in these hours, but we choose to compete at a top level and so we do. WiFi does not add to or limit our work hours.

Posted by: jd on September 8, 2003 09:36 AM

I thought the same thing when I read that line about "greater prosperity for all." Supposing the labour market remained constant, I imagine that only a trivial amount of growth would be needed for people to feel good about the economy - perhaps less than 1% (?).

Posted by: Saam Barrager on September 8, 2003 09:36 AM

"Greater prosperity only comes if US workers are trained to take higher paying jobs."

Do I ever agree. Fine comments, Eric and Bakho.

Posted by: anne on September 8, 2003 09:37 AM

I think we shouldn't underestimate the gains in nominal productivity, at least on the service side, that can be registered by beating up on existing employees. I offer as a parable the story of a friend who had long been unemployed and more recently freelancing. This week he made a choice between two staff positions, one offering a nominal 8-hour day with sporadic periods of 12-hour days expected, the other somewhat more money and a standard 10-12 hour day. Not in some heady startup, in a mature industry. (It goes without saying, of course, that both positions were classified as exempt.)

Posted by: paul on September 8, 2003 09:46 AM

"Greater prosperity only comes if US workers are trained to take higher paying jobs." I beg to disagree (as usual ;)). Who will do the low paying tasks then? Is it prosperous to have unclean homes and no hamburger resturants to go to?

Posted by: Mats on September 8, 2003 10:18 AM

>>In the current climate, I don't see the benefits of greater productivity reaching the vast pool of the underemployed or those forced into unemployment by those same productivity gains.>>

What would you suggest doing about it?

IMO, the cure would be to find a means of helping the unemployed rather than a cure which slows the economic growth.

Posted by: richard on September 8, 2003 10:25 AM

Unfortunatlely only anecdotal evidence is going to support paul's point. For what it's worth I was struck by the 'squeeze' factor while working temp jobs at 2 law firms (enlisted by the kind people at adecco) this summer.
Compared with the 2 years and 4 jobs I had pre-9/11, myself + co-workers were currently under much more pressure to work overtime, take short lunches, never view pages on the internet etc., or be replaced.
whereas pre-9/11, if overtime was demanded on a regular basis or personal calls were forbidden, many employees would simply find another job. This summer, however, fear kept everyone in line at least at the bottom rungs...

Posted by: timmy on September 8, 2003 10:27 AM

Unfortunatlely only anecdotal evidence is going to support paul's point. For what it's worth I was struck by the 'squeeze' factor while working temp jobs at 2 law firms (enlisted by the kind people at adecco) this summer.
Compared with the 2 years and 4 jobs I had pre-9/11, myself + co-workers were currently under much more pressure to work overtime, take short lunches, never view pages on the internet etc., or be replaced.
whereas pre-9/11, if overtime was demanded on a regular basis or personal calls were forbidden, many employees would simply find another job. This summer, however, fear kept everyone in line at least at the bottom rungs...

Posted by: timmy on September 8, 2003 10:32 AM

>>Another example is steel parts manufacturing as brought out in the Robert Novak column today. The Bush administration steel tariffs are hurting the auto parts manufacturing industry. >>

This nicely illustrates the folly of protectionism. Might help US steel workers, but hurts many other US workers. Not just auto parts, but auto manufacturing generally, and all related industries, and every other industry that uses steel, and ...

Posted by: richard on September 8, 2003 10:39 AM

Paul: Your example would show up as GDP growth, but not productivity growth. Productivity is supposed to measure output per input (such as hours of labor), not just output.

Posted by: Walt Pohl on September 8, 2003 11:54 AM

Paul: Your example would show up as GDP growth, but not productivity growth. Productivity is supposed to measure output per input (such as hours of labor), not just output.

Posted by: Walt Pohl on September 8, 2003 11:59 AM

Paul: Your example would show up as GDP growth, but not productivity growth. Productivity is supposed to measure output per input (such as hours of labor), not just output.

Posted by: Walt Pohl on September 8, 2003 12:04 PM

Damn you, Moveable Type! Damn your black heart to hell!

Posted by: Walt Pohl on September 8, 2003 12:05 PM

Bakho, productivity is not $ output/worker hour, it is volume output/worker hour. Changes in house prices will have no impact on productivity in homebuilding. Your other examples are also wrong. The real output measure used in nonfarm business output, i.e. goods and services produced in the United States. Imported goods and services are backed out of the numbers and not counted in the numerator. Increased exports will tend to promote U.S. productivity, however, as we send the crappy low paying, low skill, low producitivity jobs to China and India and allow U.S. workers to specialize and move up the value chain.

Posted by: Booey on September 8, 2003 12:23 PM


DEFINITION

Productivity is the amount of output (what is produced) per unit of input used.

...A simple and often-used measure of productivity is real GDP per person-hour worked in the economy. However, while real GDP is a good and comprehensive measure of total output, person-hours worked is, for many purposes, an inadequate measure of inputs because it neglects variations in the quality of labour and ignores other inputs, notably capital goods. Although more difficult to represent empirically, multifactor productivity is a better measure because it takes into account all factor inputs, not just labour.

Posted by: Charles on September 8, 2003 01:15 PM

One possible cause that I haven’t seen mentioned yet is that the internet has substantially increased the rate at which best practices/problem fixes are adopted throughout an economy. If you run into a problem with a product, chances are someone else has already run into it and solved it. Pre-internet, this meant one of three things – find someone to fix it for you, try to solve it on your own or just live with it. Now with search engines, FAQs and support groups, the answer is probably a query away.

From an employer’s perspective this is great: Put out a FAQ and a support list and you can cut the volume of support calls. Your junior staff can now solve problems that normally would have required a senior employee. Your senior people now solve problems far faster than they used to.

Previously, we had an economy where many people independently solved identical/similar problems. Going forward, we can either have an economy with the same number of problems being fixed by the fewer people or we can increase the number of problems being solved. Stimulating demand becomes all the more important.

Posted by: chris_a on September 8, 2003 04:50 PM

Output, measured net of price change and inter-industry transactions

How else does one compare a Kia to a Ferrari?

http://www.bls.gov/opub/hom/homch10_b.htm#1a

Chapter 10.
Productivity Measures: Business Sector and Major Subsectors

Description of Measures
BLS publishes three sets of productivity measures for the major sectors and subsectors of the U.S. economy, each using a distinct methodology. One measure includes labor productivity for the major sectors of business, nonfarm business, and nonfinancial corporations and for the subsectors of total, durable, and nondurable manufacturing. The second set includes multifactor productivity for major sectors; and the third measures multifactor productivity for total manufacturing and 20 2-digit Standard Industrial Classification manufacturing industries. Each set of measures involves a comparison of output and input measures.

The traditional measure of labor productivity—output per hour—was first published in 1959, and represents the culmination of a long series of developments in productivity measurement in the Bureau.1 Output, measured net of price change and inter-industry transactions2, is compared to labor input, measured as hours at work in the corresponding sector. These measures are prepared for the business sector, the nonfarm business sector, nonfinancial corporations, and manufacturing, along with subsectors of durable and nondurable goods manufacturing. These measures are available quarterly and are updated and revised eight times a year.

The second set of measures covers multifactor productivity for major U.S. sectors.3 In these measures, output is again measured net of price changes and inter-industry transactions, but the input measure is an aggregate of hours at work and capital service flows. These measures have been developed in recognition of the role capital growth plays in output growth. They are updated annually.

Comparisons of output with a broader set of inputs constitute the third set of measures.4 Because the scope of industries within manufacturing is narrower than that of the nonfarm business sector, output in manufacturing industries includes shipments to both other producers and final consumers.5 Consistent with such an output concept is an input measure which includes intermediate inputs. Accordingly, input includes labor and capital, and also energy, nonenergy materials, and purchased business services. These measures are available for a comprehensive set of 20 manufacturing industries (corresponding to the 2-digit Standard Industrial Classification (SIC) level) as well as for total manufacturing. As the focus narrows to more specific industries, intermediate inputs take on an increasingly important role in productivity measurement and analysis. This set of measures consists of annual data and is updated approximately every 2 years.

Posted by: bakho on September 9, 2003 07:15 AM

Output: Business sector output is an annual-weighted index constructed after excluding from gross domestic product (GDP) the following outputs: General government, nonprofit institutions, paid employees of private households, and the rental value of owner-occupied dwellings. Corresponding exclusions also are made in labor inputs. Business output accounted for about 77 percent of the value of GDP in 1996. Nonfarm business, which also excludes farming, accounted for about 76 percent of GDP in 1996.

Annual indexes for manufacturing and its durable and nondurable goods components are constructed by deflating current-dollar industry value of production data from the U.S. Bureau of the Census with deflators from the BEA. These deflators are based on data from the BLS producer price program and other sources. The industry shipments are aggregated using annual weights, and intrasector transactions are removed. Quarterly manufacturing output measures are based on the index of industrial production prepared monthly by the Board of Governors of the Federal Reserve System adjusted to be consistent with annual indexes of manufacturing sector output prepared by BLS. Durables include the following 2-digit SIC industries: Primary metal industries; fabricated metal products; nonelectrical machinery; industrial and commercial machinery and computer equipment; electronic and other electrical equipment; transportation equipment; instruments; lumber and lumber products; furniture and fixtures; stone, clay, and glass and concrete products; and miscellaneous manufactures. Nondurables include: Food and kindred products, tobacco products, textile mill products, apparel products, paper and allied products, printing and publishing, chemicals and chemical products, petroleum refining and related industries, rubber and plastic products, and leather and leather products.

Nonfinancial corporate output is an annual-weighted index calculated on the basis of the costs incurred and the incomes earned from production. The output measure excludes the following outputs from GDP: general government; nonprofit institutions; employees of private households; the rental value of owner-occupied dwellings; unincorporated business; and those corporations which are depository institutions, nondepository institutions, security and commodity brokers, insurance carriers, regulated investment offices, small business investment offices, and real estate investment trusts. Nonfinancial corporations accounted for about 53 percent of the value of GDP in 1996.

It is too simplistic to state that productivity is volume output per worker hour.

Posted by: bakho on September 9, 2003 09:32 AM

After the economical CRASH of 1987, while looking for work in the oil field in Indonesia and Singapore, I saw that there were "far" less workers in the offices. The work was still being done. Those companies that could lay off workers BY LAW, did so. But the work was still being done. The amount of Empire building that goes on in companies is astronomical, to say the least. Look at any Government and you will find the problem 10 fold. (If not more), Conclusion; people are just doing the job they should have been doing all along. So, why the big FUSS? Point 2, First we had the Economial crash of 87, Then, the Recession of 91!!!! Now we have the Economical CRASH of 2000, next comes the Recession of 04/05, apx. The recovery does not come for about 5/6 years after the CRASH!!!! The proof of this lies in the study of the "60 Year Cycle". You then have to merg it with the "13 year Cycle" to bring it into moderen times. Finaly you have to throw out the NBER's definition of a recession. Read their definition and there you will find out how usless it is.

Posted by: Jim Coomes on September 10, 2003 05:45 PM

After the economical CRASH of 1987, while looking for work in the oil field in Indonesia and Singapore, I saw that there were "far" less workers in the offices. The work was still being done. Those companies that could lay off workers BY LAW, did so. But the work was still being done. The amount of Empire building that goes on in companies is astronomical, to say the least. Look at any Government and you will find the problem 10 fold. (If not more), Conclusion; people are just doing the job they should have been doing all along. So, why the big FUSS? Point 2, First we had the Economial crash of 87, Then, the Recession of 91!!!! Now we have the Economical CRASH of 2000, next comes the Recession of 04/05, apx. The recovery does not come for about 5/6 years after the CRASH!!!! The proof of this lies in the study of the "60 Year Cycle". You then have to merg it with the "13 year Cycle" to bring it into moderen times. Finaly you have to throw out the NBER's definition of a recession. Read their definition and there you will find out how usless it is.

Posted by: Jim Coomes on September 10, 2003 05:46 PM

After the economical CRASH of 1987, while looking for work in the oil field in Indonesia and Singapore, I saw that there were "far" less workers in the offices. The work was still being done. Those companies that could lay off workers BY LAW, did so. But the work was still being done. The amount of Empire building that goes on in companies is astronomical, to say the least. Look at any Government and you will find the problem 10 fold. (If not more), Conclusion; people are just doing the job they should have been doing all along. So, why the big FUSS? Point 2, First we had the Economial crash of 87, Then, the Recession of 91!!!! Now we have the Economical CRASH of 2000, next comes the Recession of 04/05, apx. The recovery does not come for about 5/6 years after the CRASH!!!! The proof of this lies in the study of the "60 Year Cycle". You then have to merg it with the "13 year Cycle" to bring it into moderen times. Finaly you have to throw out the NBER's definition of a recession. Read their definition and there you will find out how usless it is.

Posted by: Jim Coomes on September 10, 2003 05:47 PM
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