August 11, 2002
New Data Confirm Amazingly Strong Productivity Trend

Usually reliable sources report that as the preliminary estimates of productivity growth were reported over the past year, Alan Greenspan was dumbfounded. "I don't believe it," he is supposed to have said. "You just can't get such high productivity growth in a recession. It will be revised down." And I don't know anybody who didn't agree, to some degree at least.

Well, the revisions are in, and the productivity growth trend is a little bit weaker, but only a little bit.

This leaves one big question: if this is productivity growth during a recession, what is the underlying trend rate of productivity growth now? I find it hard to think of a scenario in which trend productivity growth is not continuing the acceleration that began in the mid-1990s--and thus there is reason to think that the next eight years will see more rapid productivity growth than the past seven.

One caveat: with productivity surging, it's hard to be pessimistic about GDP growth, but it's easy to be pessimistic about unemployment.


washingtonpost.com: Productivity Strong Despite Revisions

...Productivity gains slowed with economic growth in the second quarter, but in the past year, the amount of goods and services produced for each hour worked rose a very strong 4.7 percent, the Labor Department reported yesterday. The department also revised productivity figures back to 1999 based on new estimates of the gross domestic product released last week by the Commerce Department. While productivity gains were lowered for 2000 and 2001, analysts said the new numbers still confirm a substantial improvement in the trend of productivity growth beginning in the late 1990s.

Productivity in the private non-farm portion of the economy increased at a 1.1 percent annual rate April through June, after a remarkable surge at an 8.6 percent rate in the first three months of the year. "Some may read this as a sign that the productivity revival is faltering," said economist Gerald D. Cohen of Merrill Lynch & Co. in New York. "But productivity accounted for all the GDP growth in the second quarter and is up 4.7 percent during the past year, more than double the rate of GDP growth." Cohen said that based on his firm's forecast for the economy in the second half of this year, productivity should rise at about a 4 percent annual rate. "It's hard to be pessimistic with productivity, the key to improved living standards, surging like that," he said...

washingtonpost.com

Productivity Strong Despite Revisions
2nd-Quarter Gain At 1.1% Annual Rate

By John M. Berry
Washington Post Staff Writer
Saturday, August 10, 2002; Page E01

Productivity gains slowed with economic growth in the second quarter, but in the past year, the amount of goods and services produced for each hour worked rose a very strong 4.7 percent, the Labor Department reported yesterday.

The department also revised productivity figures back to 1999 based on new estimates of the gross domestic product released last week by the Commerce Department. While productivity gains were lowered for 2000 and 2001, analysts said the new numbers still confirm a substantial improvement in the trend of productivity growth beginning in the late 1990s.

Productivity in the private non-farm portion of the economy increased at a 1.1 percent annual rate April through June, after a remarkable surge at an 8.6 percent rate in the first three months of the year.

"Some may read this as a sign that the productivity revival is faltering," said economist Gerald D. Cohen of Merrill Lynch & Co. in New York. "But productivity accounted for all the GDP growth in the second quarter and is up 4.7 percent during the past year, more than double the rate of GDP growth."

Cohen said that based on his firm's forecast for the economy in the second half of this year, productivity should rise at about a 4 percent annual rate.

"It's hard to be pessimistic with productivity, the key to improved living standards, surging like that," he said.

Economist James Glassman of J.P. Morgan Chase Securities in New York said the 1.1 percent growth in productivity in 2001 despite a recession "confirms that the improvement in trend productivity growth is real."

"We're still seeing better productivity than usually experienced for the observed degree of economic growth," said Maury N. Harris, chief economist at UBS Warburg in New York.

Improving productivity means in the short run that employers are hiring fewer new workers than would otherwise be the case. For example, in the second quarter, output by the non-farm business sector rose at just a 0.5 percent annual rate, but that increase occurred as the total number of hours worked fell at a 0.7 percent rate. And last year, with the recession, output fell 0.1 percent while hours worked dropped 1.2 percent. That combination pushed up the nation's unemployment rate to about 6 percent.

But in the long run, strong productivity growth means the United States has more labor available and can therefore sustain faster economic growth without causing an inflation-provoking upward wage spiral.

Other newly available figures for hours worked and changes in hourly compensation for 2001 more than offset the impact on employers' labor costs because of the downward revision in productivity gains. Previously the Labor Department had said that labor costs per unit of output rose 3.8 percent last year. That figure was revised yesterday to show only a 1.6 percent rise in unit labor costs.

While non-farm business productivity rose at only a 1.1 percent annual rate in the second quarter, manufacturing productivity increased at a 4.9 percent annual pace. Manufacturing output rose at a 4.1 percent annual rate as hours worked dropped at a 0.8 percent rate.

The Labor Department's numbers "represent a continuing trend of strong productivity growth in manufacturing," said Jerry Jasinowski, president of the National Association of Manufacturers. "These numbers are strong evidence that productivity growth is continuing to recover at a rapid pace from the cyclical downturn experienced last year."

"With productivity growth recovering, I expect that we will continue to see strong gains in workers' real incomes, which means that the foundation for continued consumer spending and sustained growth with modest inflation is in place," Jasinowski said.

© 2002 The Washington Post Company

Posted by DeLong at August 11, 2002 04:26 AM | Trackback

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Brad,

Though the continuing trend in more rapid productivity growth will help us as a whole as the potential growth rate of the economy remains high, what will happen if unemployment results in a more inequitable income distribution?

With low unemployment there was a tendency for income distribution to become more equitable. Now, we seem to be headed for both a more inequitable tax system and higher unemployment. Where is there an assurance that the benefits of higher productivity will be well shared?

Posted by: on August 11, 2002 08:19 AM

I expect labor productivity to behave much like agricultural productivity did over the past century, driving people out of the sector ... with potentially devasting consequences (whether we redistribute the aggregate gains) as large fractions of the human resource pool are "made redundant". [More on this perspective to follow, in a Labor Day timeframe.]

Posted by: RonK, Seattle on August 11, 2002 08:47 AM

There would not seem to be any necessary reason why productivity gains will cause added unemployment as long as the economy grows fast enough to absorb new workers or workers who are displaced. We recently has less than 4% unemployment and as growth quickens why can we not return to such a level. A result of low unemployment was a stemming and reversal of the trend to greater inequality. I see no reason for pessimism, if we have prudent fiscal and monetary policies to take account of a higher productivity growth rate.

Posted by: on August 11, 2002 10:27 AM

just because manufacturing industry is capable of making more things per hour, that doesn't mean that anyone wants to buy them.
Look at Germany and Japan.

Posted by: steve jennings on August 11, 2002 12:04 PM

Doesn't every cycle trough coincide with press hysteria about a "jobless recovery"?

And haven't unemployment rate peaks been getting lower and lower WHILE productivity has risen?

Posted by: George Zachar on August 11, 2002 12:43 PM

"data confirm amazingly strong productivity growth"

Bah! It's all part of a conspiracy that started when Greenspan fell under the sway of his evil liberal Democrat wife.

I read it at United Press International, so I know it's true.

http://www.upi.com/view.cfm?StoryID=20020809-044047-1253r

Posted by: Jim Glass on August 11, 2002 08:29 PM

I've always wondered this -

what are the *units* in which productivity is measured? What equations does it obey? From the description of it, it must be a quantitative variable, but is it measured in dollars per second or something more subtle?

Posted by: godlesscapitalist on August 12, 2002 12:58 AM

'I expect labor productivity to behave much like agricultural productivity did over the past century, driving people out of the sector ... with potentially devasting consequences (whether we redistribute the aggregate gains) as large fractions of the human resource pool are "made redundant". [More on this perspective to follow, in a Labor Day timeframe.]'

Yeah, society pretty much collapsed during the Agricultural to Industrial shift.....wait a minute.

Posted by: Jason McCullough on August 12, 2002 02:24 AM

'There is, in other words, now no evidence whatever of a productivity miracle in 1992-2001, the Clinton years, or the years of the New Economy.

Indeed, since the amount of capital poured into new investment was so huge in 1999-2000, it is likely that, when we get 2001 figures from the BLS next March, multi-factor productivity growth (including productivity of capital) in 1992-2001 will be found to have been considerably lower than in the preceding decade.'

Jim, that's one funny link.

Posted by: Jason McCullough on August 12, 2002 02:25 AM

Godless: In true capitalist style, productivity for the purposes of these statistics is measured in dollars of GDP per worker. You are clearly not yet fully formed as a "godless capitalist" if you think anyone would make the heretical assumption that the unit of labour input is an hour rather than a human being ...

Posted by: Daniel Davies on August 12, 2002 04:14 AM

bah ... actually, they presented the per hour numbers. Boy is my face red.

Posted by: Daniel Davies on August 12, 2002 04:16 AM

Jason -- Nobody said "collapse". But challenge, transformation and crisis, profoundly yes, and the resulting unresolved vertigo still shapes our social, cultural, political and geopolitical dynamics, and the direct economic backlog of unfinished business is still being painfully worked out in many precincts. More individuals and institutions did collapse than we are likely to notice in retrospect.

But ag depop meshed neatly with the labor demands of industrial and service economy development. The next wave might be benign, but how? Will we all become knowledge workers (for what price knowledge?), or artisans (pop divas?). Will everybody work an alloted half hour per day? Will we build pyramids, or re-feudalize?

Dunno. It's not an idle question, and the pure elasticity "like the past only moreso" projection is strictly Econ for Dummies. But it's a question for another day.

Posted by: RonK, Seattle on August 12, 2002 07:39 AM

RonK - the mass movement out of manufacturing due to increased productivity took place around 30 years ago. It _was_ devastating - causing such atrocities as Bruce Springstein and "Brassed Off". However, it hardly made large portions of the labor force redundant. If there's one thing the last 30 years has taught us, it's that the american economy has an inexhaustable need for telemarketers (how can you miss an economic event that calls you every night during dinner?)

Mark

Posted by: Mark Wright on August 12, 2002 09:00 AM

'Dunno. It's not an idle question, and the pure elasticity "like the past only moreso" projection is strictly Econ for Dummies. But it's a question for another day.'

I'd say the big problem with the ag->ind transition in that era was the anemic government. If someone comparable arises, we'll live. That is, unless the SC junks the commerce clause.

Posted by: Jason McCullough on August 12, 2002 02:42 PM

Re: the decline of agriculture, an obscure but intriguing book on farm management declares it was the conscious policy of the Eisenhower Administration, implemented through the soil bank and the interestate highway program. See Bryan Jones, The Farming Game (U of Nebraska 1982 -- I think there may be a later edition). I wonder if anyone can offer a more comprehensive and scholarly reference on point. [Sample: Jones says the soil bank was "intended to reduce agricultural preoduction and funnel the resulting surplus of farm workers into the job market. . . . The ... obsession with cheap labor and adequate transportation combined to destroy the health of rural communities and the life of the core areas of many of our major cities as well. (12-13)]

Posted by: jda on August 12, 2002 03:43 PM

Intersting UPI article. Interesting inferences from funny numbers to Greenspans wife to democrats. Is it not that tax cuts were also based on these funny stats? Or am I missing something?

Posted by: hk on August 14, 2002 04:54 PM

>>Where is there an assurance that the benefits of higher productivity will be well shared?<<

None. Jigger the tax system to redistribute less from rich to poor, cut back on education and thus increase the supply of unskilled workers, and they won't be...

Posted by: Brad DeLong on August 15, 2002 08:28 AM

RonK, it seems to me that whether we prefer consuming goods and services that seem to be, from an early 21st century perspective, superfluous (though denizens of the future may regard them as necessities) or consuming about as much as now and "working our allotted half hour a day" is up to us. In reality, we have done a little of both with past productivity growth (or rather, we have done a LOT of increased consumption and a little reduction in working hours). I would guess that we'd continue to do so. Europeans seem more keen on reducing the amount of work they have to do. Americans seem to be more into increasing their incomes.

One problem, though, is that workers don't really have as much choice as I'm implying: the distrubition of productivity gains to reduced work hours and increased income really seems to be made collectively, not individually. An American worker can rarely tell her employer "Hey, if you give me a 20% pay cut, can I have two hours off for lunch and get eight weeks of summer vacation," nor do I think a European would be very likely to be able to convince a boss to raise pay 25% if summers were shrunk to two weeks and the workweek expanded to 45 hours.

But then again, since, whatever happens, income is likely to rise and the amount of work likely to fall (Though it is possible that people would collectively choose to work longer and harder for even higher incomes than productivity gains justified, or reduce the workweek so sharply that incomes would actually fall, I don't see any reason to think that would happen.), It'll be better overall than now, though there will be some jarring dislocations without a doubt.

Julian Elson

Posted by: Julian Elson on August 26, 2002 03:08 PM
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