Greg Ip of the Wall Street Journal reports that American productivity growth in the second quarter was still 2.9% per year:
WSJ.com - Worker Productivity Rate Slows But Remains Robust: Productivity growth in the U.S. slowed... but continued at a relatively robust clip... rose at a 2.9% annual rate in the second quarter in the business sector outside agriculture.... At the same time, rapid compensation growth pushed up the cost, in wages and benefits, of producing each unit of output by 1.9% at an annual rate, the fastest in two years. Rising unit-labor costs are one reason the U.S. Federal Reserve has been anxious to raise interest rates from current low levels, although weak job growth may weaken its case a bit....
Productivity grew at just 1.5% a year from 1973 to 1995, then sped up to 2.6% between 1996 and 2000, an acceleration many observers attributed to the spread of information technology. It then accelerated even further to 4% from 2001 to 2004.
That astonishing performance seemed the result of firms trying especially hard to meet growing sales without adding to payrolls, and most economists expected it to slow sharply once businesses became confident enough to hire again.... However, productivity growth, though slower, remains better than the strong late-1990s performance, suggesting firms have yet to exhaust avenues for extracting more output per worker. Surprisingly weak job growth in both June and July suggests that a reluctance to hire still lingers....
At that rate of trend productivity growth, we need real GDP growth of 4% per year to keep the labor market from worsening--and faster real GDP growth to improve the state of the labor market.
Posted by DeLong at August 10, 2004 12:15 PM | TrackBack | | Other weblogs commenting on this postHigher productivity means workers are available to do other things.
How to get GDP growth over 4%?
We need a new technology or to rapidly expand a new technology that is coming to fruition.
Or make work:
http://desmoinesregister.com/apps/pbcs.dll/article?AID=/20040810/OPINION03/408100302/1035/OPINION
Posted by: bakho on August 10, 2004 12:57 PMThe annualized pace of real compensation growth reported in the productivity release was 0.1% for Q2, following 0.3% for Q1. Those growth rates are annualized, and they include benefits costs. Real take-home pay, by the calculations offered here, fell pretty sharply. Ip (probably correctly) identifies the acceleration in unit labor costs as a reason the Fed wants to hike rates toward neutral. The price deflator, in this case, is a two-edged sword. At 2.8%, it is getting up around levels that the Fed might no longer consider "stable" but it is also the reason that, when compensation per hour rose at a 4.9% annual pace, real compensation rose just 0.1%. So, slow inflation and with it growth (so that real compensation remains weak because of slack demand for labor), or support growth and with it, inflation (so that real compensation is depressed by rising prices). Take your pick.
Alternatively, oil prices could come down. All we have to do is find a cheap to exploit source of crude, push some pipe into the ground, acquire the infrastructure to transport and refine it, all in short order.
Posted by: kharris on August 10, 2004 01:50 PMI don't buy this "sustained" 4% productivity growth. (Not that this would be the first time I say this.) More precisely I have three quibbles: (1) underestimating GDP inflation distorts GDP-related measures, affecting the numerator of productivity and (2) "difficulties" in measuring works hours, affecting the denominator, and (3), related to (2), misattribution of outsourced/offshored labor.
Mind you, I'm not contending that the productivity numbers "as defined and measured" are incorrect, but that the definition and measurement is biased towards showing higher numbers.
First of all, some productivity growth results from improvements in technology, manufacturing processes, economy of scale, streamlining and standardizing products & services, etc. That is undisputed. But now to my points:
Ad (1). Not much to say here. Measurement of output is not directly based on units produced, but on sales corrected by price and "quality" adjustments. This is difficult to do even if well-intended; for example, it is easy to determine how many cars Ford produces, but some models or variants inside a model take more effort to produce than others, so units alone is not a good indicator. If Ford were to produce 100,000 no-frills low-end cars instead of 50,000 carefully made high-end cars, it would not mean a 100% productivity boost, or 50% loss the other way. Aggregate quality and price measures are used to compensate for this; but how precise and meaningful they are is anybody's guess. As in the weather report, "felt" inflation is higher than "measured" inflation in CPI and arguably GDP.
Ad (2). Productivity of say, a factory or design house/software company is not output per factory technician or design/software engineer, but total output divided by number of (domestic?) employees. I'm not 100% sure of this, but still very much so; how do you attribute productivity to individuals? So by cutting "peripheral" and support jobs like secretaries, copyroom/mailroom workers, HR people, facilities, etc., or outsourcing them to "cheaper" companies that are not bound by generous salary & benefits policies, "output per employee" can be increased.
The consequence, supported by anecdotal evidence, is that "production" employees are loaded with more clerical tasks (and in the case of managers, perhaps performing HR related functions), which are informally understood not to be part of their primary job description, but to be done on the side, and are not considered when making schedules, for example. On other things, the quality of services provided to employees may drop, e.g. by longer response times, stocking the coffee machines less often, directing employees to computerized "self service" etc.
Ad (3). Outsourcing production of parts or some services may create the impression that the company from which the activity was outsourced is becoming more productive. If the outsourcing happens within the same economic region (or sector), the outsourced effort still shows in terms of worker hours elsewhere. (But if the outsourced job is at worse conditions, it may appear more "productive" than when it was in-house. Presumably that's why it was outsourced to begin with.) If outsourcing is to outside the economic region, e.g. offshore, the hours worked "disappear", and are replaced by cash outflows and imports; however the latter may be discounted by exchange rate effects and lower foreign cost, analogously to the outsourced labor at worse conditions.
What do you think?
Follow-up to my previous post: As opposed to other posts of mine on similar matters, I did not mention the effect of unmeasured & underreported working hours, as I suspect is common for non-hourly employees, who often in addition to having fixed "imputed" work hours, are in professions that lend themselves to "slaving" from home.
But supposedly productivity rises also in sectors where this can be assumed not to apply to a significant extent, e.g. manufacturing.
Productivity growth is as high as it is BECAUSE hiring is flat. New hires and new fires are both marginal workers - one would expect marginal productivity to be lower than average productivity, so large numbers of hires would necessarily lower productivity and fires the reverse, ceteris paribus.
If hiring were solid, productivity increases would be much lower. Real GDP growth of 4% per year, consistently, is a pipe dream - 2.0 - 2.5% is more to be expected in a developed country. We only did better than this in the '90s because we were bubbling (should someone who worked at pets.com be considered "productive"?), and we were seeing the tail end of the '70s to '90s entry of women into the work force. They are here, now - share of population in the labor force will be constant for a few years, then start to drop as boomers retire.
In fact, early retirement seems to be forcing labor participation down already. (It isn't all Bush, some of it is 40-50 year olds who have enough to retire on not wanting to work for non-bubble period wages.)
Posted by: rvman on August 11, 2004 11:27 AMrvman: "should someone who worked at pets.com be considered "productive"?"
The concept of productivity (as commonly understood) has nothing to do with value judgements imposed on the subject matter regarding whether it is useful or not. I'm sure at least a number of people at pets.com were working hard to turn out whatever product/service they were aiming for, or running operations. And then some probably became good "professional" ping-pong players.