October 31, 2002
Third Quarter Productivity Growth

Average hours per worker shrank at a 1.2% annual rate between the second and third quarters of 2002. The number of employees on payrolls rose at an 0.4% annual between the second and third quarters of 2002. thus total hours shrank at an annual rate of 0.8% between the second and third quarters of 2002.

Real GDP grew at a 3.1% annual rate between the second and third quarters of 2002.

Put these numbers together, and realize that when the Bureau of Labor Statistics calculates productivity growth for the third quarter of 2002, its estimate will be that productivity grew at a 4.0% annual rate.

Take the 7.6% growth rate of the last quarter of 2001, the 8.3% growth rate of the first quarter of 2002, the 1.7% growth rate of the second quarter, and now the third quarter's 4.0%, and realize that over the past four quarters America's measured economic productivity has grown by 5.4%.

This is an amazing performance for a time over which total hours worked have been falling. In the eleven years between 1959 and 2001 in which total hours worked have fallen, productivity growth has averaged only 1.5% per year. In the eight years since the start of the post-1973 productivity slowdown in which total hours worked have fallen, productivity growth has averaged only 0.9% per year.

Posted by DeLong at October 31, 2002 01:29 PM | Trackback

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I am curios to know if the hours and the change in hours worked by exempt people are taken into account or if these stats just count hourly workers?

I have been hearing anecdotal evidence that the “crazy” 60-80 work weeks in high tech that were common in the boom phase start ups has faded significantly. Those working long hours were probably less productive in the last several hours than they were in the middle of their day. On software projects it is often commented that you can get negative productivity from working while you are fatigued and creating bugs at a higher rate. Some of this might be captured in hours worked by contractors (if contractors are counted) but a lot of the these workers would be exempt

Posted by: Rob Sperry on October 31, 2002 02:54 PM

When I see this, I can't help wonder which is the chicken and which is the egg from production and productivity (assuming the economy is not capacity constrained - which it certainly isn't).

I mean why do producers decide to produce in spite of lack of demand? Is it that in a downturn they try to sustain P*Y by raising Y in the face of slumping P? Now, it feels like it's time for me to go back to my old notes... ;-) My only consolation is that the Council of Economic Advisors should probably do so too.

Posted by: Jean-Philippe Stijns on October 31, 2002 03:37 PM

>>Is it that in a downturn they try to sustain P*Y by raising Y in the face of slumping P?<<

Self, that still doesn't make since since raising Y "production" does nothing to raise revenues unless Y "demand" catches up. Or is it that producers believe in Say's Law to some degree? Why not, most of them don't even seem to understand the concept of marginal analysis, but then again, one doesn't need to be a rocket sientist to be a billiard champion...

Posted by: Jean-Philippe Stijns on October 31, 2002 03:41 PM

>Or is it that producers believe in Say's Law to some degree? Why not, most of them don't even seem to understand the concept of marginal analysis, but then again, one doesn't need to be a rocket sientist to be a billiard champion...

The marginal operating costs of a chip plant are relatively small compared with the capital amortisation charges so it makes good business sense to keep the plant going so long as it can make any contribution towards covering fixed costs. As a consequence chip fabrication for competitive markets is subject to volatile price swings just as with traditional industries with a similar cost configuration. One competitive strategy is to be early in the technology innovation curve where margins are initially better for an incoming generation of chips but, of course, if all attempt that the price is driven down. Under market pressure, chip makers will try to diversify into making application specific chips (ASICS) where margins are usually better.

Posted by: Bob Briant on October 31, 2002 04:35 PM

Pardon my economic ignorance, but one what basis is the 'hour' measured? I recall some of the controversy over certain Wal-Mart stores 'encouraging' their employees to work off-clock; may it not be a factor that in times when job security is perceived as, um, dubious, employees are more likely to work 'black' hours, off the official pay-clock? Think of it as the converse of the 60-80 hour 'boom' working week...

Posted by: nick sweeney on October 31, 2002 06:18 PM

Professor Delong,

Your general comments on why this is occurring (or what is different this time around) would be appreciated, if you have the time to spare.

Posted by: Kenneth on October 31, 2002 09:55 PM

Good point, Bob, and I think it applies to many high K : L ratio industries.

Add to this the fact that each producer although not realitistically atomistic only faces a portion of the cost she imposes on the industry by raising her supply...

and if, somehow, the typical manager cares at least partly about turnover (perhaps because she wrongly percieves industry-wide dips in turnover as a threat to market share - or that it enters directly into her personal utility function for prestige reason etc - or because with a high turnover it's easier to hide losses or boost pseudo accounting profits)...

... and you get an interesting story about self-fulfilling and accelerating deflation.

Comments welcome!

Posted by: Jean-Philippe Stijns on October 31, 2002 10:09 PM

The following comments are from Andrew Sullivan!:


"THE PRODUCTIVITY MIRACLE: Brad DeLong, with whom I often disagree but who's invariably worth reading, points out some interesting data in the latest economic report. Bottom line:
Take the 7.6% [productivity] growth rate of the last quarter of 2001, the 8.3% growth rate of the first quarter of 2002, the 1.7% growth rate of the second quarter, and now the third quarter's 4.0%, and realize that over the past four quarters America's measured economic productivity has grown by 5.4%. This is an amazing performance for a time over which total hours worked have been falling.As readers know, I'm no trained economist, but it strikes me that the huge productivity gains of recent times are extremely good news for all of us. There was much in the boom that was dumb, much in the bubble that was ludicrous, but much underneath that may one day be seen as a big leap forward for the American economy."

Posted by: David Thomson on November 1, 2002 04:17 AM

Warning: IANAE (I Am Not An Economist).

Well, well. This reminds me of the productivity "miracle" in East-Germany in the first half of the 90's: working hours fell dramatically and productivity boomed equally dramatically from 50% of west-levels to more than 70%. The economic reality (widespread mass bankruptcies) behind it all was anything but positive. Same phenomenon at work here? (less dramatic of course).

Posted by: Chris K on November 1, 2002 07:39 AM

It is insulting and outrageous to even hint that our current American economic reports are similar to the lies of the former East-German Government. Why is it so difficult for some people to admit that democratic capitalism works splendidly to make the pie bigger for everyone?

Posted by: David Thomson on November 1, 2002 08:25 AM

There is no longer much question about the validity of the productivity numbers. We have experienced a surge in productivity since 1995, and it should continue for years. That does not mean, however, that the economy is growing in a healthy manner. The surge in productivity and the slow growth mean that we are not generating enough jobs and that we may well be edging closer to deflation.

Paul Krugman has repeatedly stressed that high productivity growth can be found in economies that are growing too slowly to allow for healthy levels of employment.

The 3.1% GDP growth is too slow, and we will surely grow less than that this quarter. In October, there was no national job creation. We have a problem.

Posted by: on November 1, 2002 10:31 AM

>>is an amazing performance for a time over which total hours worked have been falling.<<

It's the other way around Sully... There is nothing suprising to see that producitivity growth increases when firms cut slack, marginally productive workers. What the rest of us is wondering about is: how much of current productivity growth is due to lay-offs vs. continued technological progress. It's obviously a mixure of these elements, and essentially an empirical question.

>>There was much in the boom that was dumb, much in the bubble that was ludicrous, but much underneath that may one day be seen as a big leap forward for the American economy.<<

That's better for a change...

Posted by: Jean-Philippe Stijns on November 1, 2002 10:58 AM

Paul Krugman

"What most people mean by recovery is job growth - an economy that is growing, but in which employment grows more slowly than the labor force, may be in recovery by some measures, but it will feel like it's still in recession.

Now what does productivity growth do? It raises incomes and hence demand. But it also raises the growth rate the economy needs to achieve to create jobs, and to a first approximation it does so by exactly the same amount. That is, an economy with 3 percent productivity growth will, other things equal, have 2 percent faster demand growth than an economy with 1 percent productivity growth; but it will also need a growth rate 2 percent higher to keep unemployment from rising.

In fact, the "productivity growth helps jobs" story, if that's what it is, is just the flip side of the lump-of-labor fallacy, which says that productivity growth reduces employment - and equally wrong....

You might say that I'm being too abstract; what about the lessons of history? But they all confirm this point. Terrific productivity performance in the 1920s didn't protect us against the Depression; all through the 70s and 80s Europe had higher productivity growth than the U.S., but worse job growth; you can multiply the examples.

Posted by: on November 1, 2002 11:18 AM

Gentlemen (why so few ladies?) ,

Some of the contributions here discuss the push to keep output up in the face of falling prices and the falling demand that falling prices sometimes imply. However, over at least part of the period under discussion, output for many firms was not rising. Certainly in the period just prior to the one Professor DeLong mentions, output was falling in most sectors. Still, productivity was rising. The question about why managers continue producing is interesting, but it is not the only question, perhaps even the key question, here. (My guess is that, compensation plans being what they are, you stop getting paid very soon after you stop producing, even if the decision to stop producing is optimal for owners. Everything else is just some permutation of that simple truth.) When sales and inventories are both falling, managers were producing a heckofalot less than before. What I really want to know is how you keep ahead of stagnant or falling demand in producing more per worker hour. Surely some of it is as Mr Sweeney suggests. I know I am “producing” more than a year ago because I have to. You might still get a self-fulfilling deflation (disinflation, anyhow), for much the same reason, whether output is rising or falling. Sullivan’s “much that was dumb” probably helps explain some of the rise in productivity. As the hours devoted to what now seems dumb (who knew?) are shed, they are no longer piled on top of hours devoted to productive (marketable) endeavors, so output per hour improves.

Posted by: K Harris on November 1, 2002 12:22 PM

Productivity is usually low or falling in recessions. Companies are reluctant to lay off workers. Conversely, during recoveries productivity usually grows at a good clip; companies are reluctant to hire and try to produce more with the same workers.

I wonder if better information is having an effect here. Companies can respond more quickly to economic news because they have better information about the whole supply chain and its state.

Posted by: Ernst Blofeld on November 1, 2002 01:13 PM

Why indeed are there so few ladies?

Please help a philosopher trying to understand economics. When I read the GDP and employment reports I become worried. The economy is growing far too slowly, employment is barely growing at all, consumer confidence is falling. Productivity alone is fine. Why do so many Wall Street economists and reporters find things just ducky? Surely the economy is weak, so weak the Fed may have difficulty spurring growth with another round of rate cuts.

On Wall Street only Stephen Roach seems worried. Why? Does job creation matter to more than just those who need work? Why should we expect the Fed to make all right on Wednesday?

Posted by: on November 1, 2002 01:16 PM

What does 'the economy is growing far too slowly' mean? GDP/person is rising. Why is employment important? That raw number ignores so many important things that it is almost as useless as unemployment numbers. Factors such as changing demographics and changing leisure consumption mean that employment numbers can be uninformative. Why do people say 'surely the economy is weak'? We make lots of stuff. We make more than we did last year. What is weak? Do you mean below trend? (if so, what trend). The bottom line is that GDP/person is still rising ==> more consumption goods per person. That seems like the most important statistic.

Posted by: Michael on November 1, 2002 04:48 PM

>>Why is employment important?<<

It's interesting no economists since Keynes never questioned that :-D
(which is so bizzare in a world were exploding unemployment on both sides of the Atlantic a.o.t. led to a world war.)

... except perhaps for some Chicago economists who postulate unemployement does not exist because it simply means people prefer sitting on their couch eating bonbons rather than accept a lower paying job. Hence, for them, unemployement is a just rational decision involving a choice between the disutility of work and what the worker believes she could get.

The only problem with all that, is that it's crap nobody really pays attention to anymore in the rest of the profession. The unemployed want to work: sociologists will tell you that employement, besides money, means a role in society (how suprising!). And wage regidities and other social norms are such that it's near impossible for the unemployed to sell themselves out below a certain wage rate.

I didn't know conservatives would go as far as denying the existence and meaning of unemployment to be able to claim that the administration is doing a good job with the economy...

Tout va tres bien, Madame la Marquise,
Tout va tres bien (bis)
.

And why don't the unemployed eat cake, instead? ;-) I always forget that poverty doesn't matter so long as the top 1% as an increasingly big cake to party with.

Posted by: Jean-Philippe Stijns on November 2, 2002 01:14 AM

I guess I'm one of those 'Chicago economists'. They do not say unemployment doesn't exist. They say that people looking for any job (not a position with certain benefits and pay) can almost always find a job. The profession of economics pays quite a bit of attention to what those 'Chicago economists' say. In fact, many economists at schools such as UCLA, Minnesota, MIT, Rochester, Iowa, . . . also say the same things. Perhpas you mean the profession of sociology, which pays little attention to logical thought (perhaps I have only met a poor subsample of sociologists). What wage rigidities are you talking about? And 'social norms'? Wow. Are you saying that people would rather be unemployed than take a lower paying job b/c it is more acceptable in society? That sounds a lot like the person is engaging in some rational decision concerning disutility from work and utility from leisure . . .
Or maybe you just think everyone is too stupid to think for themselves. People are just programmed by society (social norms?) to be unemployed instead of taking a lower paying/less prestigous job. Or maybe I misunderstood. Please clarify :)

Posted by: Michael on November 2, 2002 12:37 PM

>>Perhpas you mean the profession of sociology, which pays little attention to logical thought (perhaps I have only met a poor subsample of sociologists).<<

No, I mean "salt water economics" as studied at tought at UC Berkeley, Stanford, Harvard, MIT, that it pretty much everywhere else than in the Mid-West :)

>>What wage rigidities are you talking about? And 'social norms'? Wow.<<
>>Or maybe you just think everyone is too stupid to think for themselves.<<

Have you paid any attention to he last to batches of Nobel Prizes? George Akerlof is one those who introduced social norms in wage setting behavior theory. He was also one of those who introduced efficiency wages as a way to understand unemployment.

And I think that the idea that economic agent are perfectcly rational and have 100% forsight (conditional on the available information, of course) now only lives in the mind of "fresh water economists." For the rest of the profession, these extreme assumptions are at best mathematical tricks, and more realitically speaking a useful benchmark.

Posted by: Jean-Philippe Stijns on November 2, 2002 02:49 PM

Yet another data point, hopefully, along the road to discrediting the already intellectually bankrupt concept of "productivity".....

Posted by: DD on November 2, 2002 02:51 PM

I got paid to sit on my thumbs for nine months in 2001. I showed up daily, taking credit for the 37.5 hour work week while upper management played a hot game of chess with middle managers as pawns. I was paid and working but completely *UNproductive*. I am told by peers in other large companies that IT is often run this way in large corporations. I just happen to be qualified for a job that is prohibitively difficult to fill within the project ramp-up phase. Sometimes I am paid to be nonproductive because nine months away there is no guarantee that a replacement will be available.

Also, after a burst of productivity, I have solved problems that no longer require hours of human attention. Therefore, sometimes reduction in man-hours is an indicator of my real productivity. In the "slack time" I meditate on the next problem so that I can leverage existing infrastructure to reduce the need for human attention. Therefore some slack time is actually productive time for me.

This new economy does not create value like the manufacturing sector. If you don't need new measurements, you at least need explicit and very carefully redesigned interperetations.

Posted by: JM on November 6, 2002 06:54 AM

One of the lessons learned of the 1990s is the scope of the economic fraud. We now realize what happens when the economy has unreliable information. It is not debatable whether the information from the 1990s was in error, or that capital was mis-allocated. What is debatable is why despite repeated complaints about the data errors, were those concerns discounted by economists, members of the media, and those entrusted to “oversee” and “provide an outside view of the situation.”

Engineering Reality at Odds with Government Data

It defies the laws of physics to report ever-increasing rates of productivity while NNP is falling or no higher than it's peak.

It is impossible to have "higher productivity" when the actual output has stopped rising. We do not have "high growth, high employment, without inflation" because of productivity, but because of deflationary pressures.

Internal validity problems

The productivity data which BLS reports is also at odds with their own data. BLS reports higher employment, yet falling number of hours worked. Simplistically, we know that output has not exceeded the peak value. What is actually happening is the output is measured in terms of "services" at their cost, and ignoring the underlying weakness in margins and growing debt. Both falling margins and rising debts are not symptoms of greater productivity, but of debt-deflation.

Review

I appreciate the illusion the productivity-enthusiasts have. However, we live in a world where the information has proven unreliable. It is painfully obvious that the so-called economic miracle has nothing to do with productivity gains, but with debt-deflationary pressures. Because the Fed has for so long confused "productivity gains" with "debt-deflationary pressures" the Fed believed an illusion to justify non-sense monetary policy.

There is no new paradigm. Productivity gains are an illusion. Actual output is falling. If we truly had productivity gains those gains would be permanent. Today, we realize those gains are transitory as the margins fall, debts, rise, and true NNP is no higher than the peak. This is not productivity, but increased inefficiency. Yet another symptom of debt-deflation. The same people who lied about the “new paradigm” are lying about the “productivity miracle.” It is an illusion, just like the profits which are created out of debt, hidden derivatives, and special purpose entities.

Conclusions

The answer to why so much data went unquestioned has much to do with people not wanting to rock the boat. Rather than ask qestions about what didn’t make sense, they signed off on data and conclusions that they truly do not understand. Hoping to avoid looking foolish when thrown piles of non-sense from corporations who are hoping to spin a story so they meet their sales targets, they simply went along with what everyone stated without really asking, “How is this possible?” There is no credible answer. A lot of non-sense has been spewed about.

It is time for the public to ask the engineers, economists, and academia, “Where were you?” A lot of money was spent providing funding research, yet the country got cursory reviews, weak arguments, poorly crafted debates, and many people singing off on non-sense. It remains to be seen what types of conflicts existed in the media and academia that would allow such non-sense to go unchallenged.

To those who scoffed at the concerns about deflation, what was “impossible” has now arrived. To those who have argued, “Prove there is no productivity.” You have unsuccessfully shifted the burden of proof.

Rather, there ~cannot~ be an improvement in productivity when NNP is either below or at the peak levels. There is no valid argument that the reason we have “high growth, high employment, without inflation” is due to productivity; rather, it has everything to do with deflationary pressures that are a pressure on prices.

We have debt-deflation where by debt-laden companies do not have pricing power. The illusory productivity has allowed the Fed to get away with disastrous policies. The country has run out of options. There is no credible solution. Much money was spent funding PhD research, yet the results have been unimpressive. There is no back-up plan to debt-deflation, there is no credibility in the data, and the current leadership has no clue what to do about debt-deflation.

A financial crisis and a loss of confidence can translate into some pretty nasty stuff. We’ve seen the results in Indonesia, Ivory Coast, Ecuador, Argentina and Chechnya. We have yet to be given a coherent argument to explain why the US is immune to the similar ill-effects of debt-deflation. There is no magic wall around the United States except a wall of denial.

Posted by: on November 10, 2002 08:58 PM

Abstract

There is no new paradigm. Productivity gains are an illusion. Actual output is falling. If we truly had productivity gains those gains would be permanent. Today, we realize those gains are transitory as the margins fall, debts, rise, and true output is no higher than the peak. This is not productivity, but increased inefficiency. Yet another symptom of debt-deflation. The same people who lied about the “new paradigm” are lying about the “productivity miracle.” It is an illusion, just like the profits which are created out of debt, hidden derivatives, and special purpose entities.

Introduction

One of the lessons learned of the 1990s is the scope of the economic fraud. We now realize what happens when the economy has unreliable information. It is not debatable whether the information from the 1990s was in error, or that capital was mis-allocated. What is debatable is why despite repeated complaints about the data errors, were those concerns discounted by economists, members of the media, and those entrusted to “oversee” and “provide an outside view of the situation.”

Engineering reality at odds with government "data"

It defies the laws of physics to report ever-increasing rates of productivity while NNP is falling or no higher than it's peak. It is impossible to have "higher productivity" when the actual output has stopped rising. We do not have "high growth, high employment, without inflation" because of productivity/

Rather, we have "high growth, high employment, without inflation" because of deflationary pressures that are keeping a lid on prices, as evidenced by lack of pricing power in debt-laden companies. When physics, science, and laws of thermodynamics are discounted as “not being relevant” it is not just the sign of a mania, but the sign of a massive fraud to exchange their trash for our cash.

Internal validity problems

The productivity data which BLS reports is also at odds with their own data. BLS reports higher employment, yet falling number of hours worked. Simplistically, we know that output has not exceeded the peak value. What is actually happening is the output is measured in terms of "services" at their cost, and ignoring the underlying weakness in margins and growing debt.

Both falling margins and rising debts are not symptoms of greater productivity, but of debt-deflation. It remains to be seen how many other similar trends remain unchallenged and blindly accepted as a fundamental assumption for management “business decisions,” “due diligence” prior to M&A, or the reasonableness of accounting decisions or management plans.

When the country has a deteriorating financial situation but the data is not challenged, then we’ll continue to have more non-sense financial transactions that require greater volumes of non-sense to create the illusion of competitiveness. Read= “Large derivative debt-bomb that is going to explode.”

Unreliable corporate governance

I appreciate the illusion the productivity-enthusiasts have. However, we live in a world where the information has proven unreliable. It is painfully obvious that the so-called economic miracle has nothing to do with productivity gains, but with debt-deflationary pressures. Because the Fed has for so long confused "productivity gains" with "debt-deflationary pressures" the Fed believed an illusion to justify non-sense monetary policy.

Incentives to say nothing

The answer to why so much data went unquestioned has much to do with people not wanting to rock the boat. Rather than ask questions about what didn’t make sense, they signed off on data and conclusions that they truly do not understand. Hoping to avoid looking foolish when thrown piles of non-sense from corporations who are hoping to spin a story so they meet their sales targets, they simply went along with what everyone stated without really asking, “How is this possible?” There is no credible answer. A lot of non-sense has been spewed about.

Where were the experts?

It is time for the public to ask the engineers, economists, and academia, “Where were you?” A lot of money was spent providing funding research, yet the country got cursory reviews, weak arguments, poorly crafted debates, and many people singing off on non-sense. It remains to be seen what types of conflicts existed in the media and academia that would allow such non-sense to go unchallenged.

Those “experts who failed on the board” are the same “experts” who are “leaders” in their industries--academia, financial, investment banking, accounting. These are the same industries that train our managers who learn how to gloss over inconsistent information. These are the same industries that have no woken up to the risks of debt-deflation. Many non-sense financial transactions that should have been rejected were approved on the basis of non-sense science, illusory results, and unchallenged inconsistencies.

Sophistry does not change reality

To those who scoffed at the concerns about deflation, what was “impossible” has now arrived. To those who have argued, “Prove there is no productivity.” You have unsuccessfully shifted the burden of proof. It is clear that the financial reporting system, not the public, has the burden of proof. At this juncture there is a reasonable basis to throw out all the data and send them back to the boards.

It is time the corporate boards come up with any credible excuse why the public should have any confidence in any of the data they provide. This is not a perception problem. This is an integrity problem. At this juncture, there is a reasonable basis to withdraw all confidence and support form the US financial reporting and regulatory system.

Non-sense defies science

Rather, there ~cannot~ be an improvement in productivity when NNP is either below or at the peak levels. There is no valid argument that the reason we have “high growth, high employment, without inflation” is due to productivity; rather, it has everything to do with deflationary pressures that are a pressure on prices.

Debt-deflation

We have debt-deflation where by debt-laden companies do not have pricing power. The illusory productivity has allowed the Fed to get away with disastrous policies. The country has run out of options. There is no credible solution. Much money was spent funding PhD research, yet the results have been unimpressive. There is no back-up plan to debt-deflation, there is no credibility in the data, and the current leadership has no clue what to do about debt-deflation.

Risks

A financial crisis and a loss of confidence can translate into some pretty nasty stuff. We’ve seen the results in Indonesia, Ivory Coast, Ecuador, Argentina and Chechnya. We have yet to be given a coherent argument to explain why the US is immune to the similar ill-effects of debt-deflation. There is no magic wall around the United States except a wall of denial.

Conclusion

There is a reasonable basis to conclude that the same illusory data audits that occurred at the corporate level also occur at the government level. There is no incentive for the government to say, "You're interpreting the data incorrectly" is the last breath of desperation from those how know the stakes are high. There is the rude reality the United States is stuck in a debt-deflationary liquidity trap.

If it were admitted that the productivity data in the wake of abysmal NNP performance were illusory, the national leadership would lose legitimacy. It would be clear to the world realizes the US no longer has effective monetary and fiscal policies. This government is not to be trusted. Just as the analysts have lied, so too has the government fudged the data to create the illusion of a miracle when we actually have an unfolding disaster.

Posted by: on November 10, 2002 09:26 PM
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