December 04, 2002
Yet More Good Productivity News

The productivity news keeps getting better and better. Even I, a productivity optimist, am amazed and bemused. Today saw yet another data point supporting the proposition that the acceleration in economic growth that began in the mid-1990s has serious legs--that the current employment slump has not cooled it off at all.

The only dark lining inside this silver cloud is that faster productivity growth means faster potential output growth and a widening gap between output and potential. Before 1995 a 4 percent GDP growth rate like the one we saw in the third quarter would push unemployment down. But because productivity rose so fast, unemployment rose: a 4 percent GDP growth rate combined with a 5.1 percent productivity growth rate implies that in the third quarter total hours worked fell at a rate of 1.1 percent per year.


WSJ.com - Worker Productivity Grew A Brisk 5.1% in 3rd Quarter: Worker productivity grew much faster in the third quarter than originally thought, an encouraging sign for the nation's struggling businesses.Productivity rose at a brisk 5.1% annual rate, the Labor Department reported Wednesday. That reading -- which measures the amount of output per hour of work -- was even better than the impressive 4% growth rate previously estimated for the July-through-August period and represented a considerable pickup from the 1.7% pace registered in the second quarter. The latest figure was also much better than economists expected.Improved productivity helps companies by keeping a lid on labor costs for each unit produced and allows businesses that have cut their payrolls to keep pace with consumer demand.... Productivity gains also allow the economy to grow faster without triggering inflation since companies can pay workers more without having to raise prices to cover the cost. Keeping inflation at bay gives Federal Reserve policy makers room to lower interest rates to kick start the economy without fear of igniting price increases.

The government reported last week that the gross domestic product -- considered the best measure of economic health -- grew at a brisk 4% annual pace in the third quarter. That was stronger than the 3.1% growth rate first estimated. But economists are predicting the summer boom will be followed by a winter lull. They are forecasting a fourth-quarter economic growth rate of just more than 1%...

Posted by DeLong at December 04, 2002 07:19 AM | Trackback

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Comments

They say there's no such thing as a stupid question but...

If productivitity is output/labor hours then could the increased productivity of the last year or so simply be explained by the firing of the least productive workers?

Also can anyone clarify the role of overtime. I once looked at the BLS site and couldn't quite figure out if salaried workers overtime was counted in the labor hours, or if it only 40 hours was used, so that increased overtime would appear as increased productivity?

Posted by: on December 4, 2002 08:14 AM

Productivity gains have been ample for the past 7 years, so my guess is that recent gains are not produced by cutting owkrers.

Stephen Roach has argued that the 40 hour work week is a fiction for many salaried workers, my wife spends twice 40 for patients, but productivity is still rising amply. The productivity surge since 1994-1995 seems quite real, though Paul Krugman also warns of the problem of slow growth in a high productivity period.

Posted by: on December 4, 2002 11:09 AM

Thoughts would be welcome on why American productivity appears so much more robust since 1994-1995 than European or Japanese productivity.

Though Europe and Japan have been growing more slowly than America, is this alone enough to explain the differences in productivity growth?

Please do comment.

Posted by: on December 4, 2002 01:45 PM

A lot of productivity growth comes from high technology. And it's not just Moore's Law, there's lots of technology sectors (storage on disk drives, for one standout example) where the productivity gains have been far beyond phenomenal. And the importance of technology in the American economy was larger than Europe's in 1994-1995 and the difference has only grown since then.

Europe also has rigid labor laws, increasing sick day and holiday benefits, and generous retirement policies relative to the United States. It's also worth noting that German reunification took place in 1990. There was a brief boomlet in the immediate wake of reunification, but then the lunacy of the one-to-one currency exchange became apparent and the German economy went into a malaise that it's unlikely to recover from anytime soon.

Posted by: Anarchus on December 4, 2002 02:41 PM

(cough) I do know the plural of ancedote is not data, but I'm hearing a number of stories that confirm my own experience working in an American company. Unofficial, unpaid, unrecorded overtime appears to be going up dramatically.

Often the employer doesn't even need to ask for it -- when there are regular waves of "force adjustment" removing one's colleagues week after week, a social climate quickly arises where it seems, um, inadvisable to be seen going home after only eight hours at work.

So, I wouldn't be too quick to believe in all of that increase in productivity. Some, sure. There is technology. But some of it is an illusion. If you put in 65 hours a week, but you only report 40 hours, your week's output is very likely going to go up. It's going to look as if you're amazingly more productive, when in fact, counting fatigue, disaffection, and so on, your real hourly productivity may have gone down.

Which is to say, the observed productivity improvements may be, to some extent, an indirect consequence of downsizing, not because the less productive workers have been removed, but rather, because it has caused a marked skewing in the (measured) denominator.

Posted by: Canadian Reader on December 4, 2002 06:19 PM

(Gah.) *** anecdote ***

Posted by: Canadian Reader on December 4, 2002 06:26 PM

I don't have the details of empirical productivity research at my fingertips, so this will be a little broad-brush, but...

With respect to the first comment, regarding firing the least productive workers, keep in mind the difference between cyclical effects, and trends. Productivity does move across the cycle as workers are laid-off/hired, so that the capital/labour (and thus labour/output) ratio is varying.

I presume that where it says "The latest figure was also much better than economists expected", those expectations were already factoring in the aforementioned cyclical effects.

And regarding the claim that "Unofficial, unpaid, unrecorded overtime appears to be going up dramatically", I guess my question would be, over what time period? You're right, it won't feature in the official numbers, and thus productivity calculations will be affected. But I thought this was an ongoing change, and again, one which there was at least some awareness of in the circles where productivity issues are discussed.

Or is the claim that unrecorded overtime has shot up recently, meaning the most recent productivity numbers simply reflect nothing but unpaid extra work?

Posted by: Michael Harris on December 4, 2002 08:00 PM

Not a claim, really, only a hypothesis offered for consideration, based on personal experience and observation.

Clearly if the hypothesis is true, published productivity numbers won't be telling the whole story, but designing a study to decide whether it is true would be inherently difficult -- when people are not recording the extra time they spend at work, how the devil does one find out how much the effect is skewing the published numbers? I don't know.

If it's true, then, by being paid for 40 hours and working 40 + n hours, workers are effectively accepting a cut in their hourly pay. An increase in the value of n doesn't affect their disposable income (assuming the tactic works and they succeed in retaining their jobs), but it does reduce the hours they can spend on leisure activities. Perhaps one would see a shift in the nature of leisure, a trend toward more "concentrated" leisure activities, an increased willingness amongst those still employed to trade money for time. Perhaps, also, an up-tick in sleep deprivation?

But the trend has been going on for some time now. Has the effect accelerated with the downturn in the economy? Hard to say. So I'm not asserting anything, just throwing out a thought in the hopes that someone better versed than I in the methodologies of measurement might suggest a factor to serve as a proxy to measure whether this is in fact happening.

Posted by: Canadian Reader on December 5, 2002 11:19 AM

Canadian

I wish I was sufficiently up to speed with the latest productivity studies to have more coherent answers.

I do know there are data sources that list time-use, as well as paid verus unpaid overtime. To graft these into productivity studies does involve mixing one's data sources, a necessary bit of adding-apples-to-oranges ... but there ARE ways of acknowedging and dealing with that problem.

Not perfect solutions, I grant, but how many solutions are perfect when it comes to data? Interesting question nonetheless.

Posted by: Michael Harris on December 5, 2002 07:24 PM

I am not an economist, but I was a senior executive at Boeing before retirement. At Boeing, we never had measures of productivity other than sales per employee and return on net assets. The problem with measuring improvements in these parameters as a measurement of worker productivity is that as you outsource work, your sales per employee go up without necessarily any change in sales and as you sell of the assets not needed after outsourcing, your return on net assets goes up without necessarily any real increase in worker productivity.

If I outsource 10% of my business and layoff 10% of my workers, my apparent productivity goes up because my sales per employee. I don't believe that companies, such as Boeing, report to the government, the amount of unfinished and finished products that they buy from other companies so I don't know how the government can measure true value added by a Boeing worker or any other company's worker.

When the supplier reports an increase in sales due to increased workers to do the outsourced work. His productivity does not necessarily go up, but when I combine the sales/employee of a final prcduction company and the sales/employee of the new supplier, the apparent sales/employee go up for the combination goes up and could be interpreted as productivity gains. The problem is even worse if the supplier is foreign because their contribution to the sales/employee would not be included.

If output per U.S. worker is based on true value-added, how do they get the data.

Posted by: Will Smith on December 6, 2002 05:22 AM

Will: Of course productivity goes up when Boeing outsources - that's what outsourcing is for! Or put another way, if the company that Boeing outsources to can't do it faster, cheaper, better, then outsourcing is a bad business decision for Boeing. At heart, it's a classic "buy or build" business decision.

The general trend for society and for businesses has been towards more and more specialization for centuries now. Lots of big successful companies (Cisco comes to mind) manufacture almost NOTHING anymore. Because their greatest core competency is in research, design, engineering, specification and marketing support. And in an incredibly fast-paced industry such as technology, a company can move a lot faster if it outsources manufacturing to companies that specialize in that business skill (Jabil, Flextronics, etc).

Posted by: Anarchus on December 6, 2002 08:55 AM

>>If productivitity is output/labor hours then could the increased productivity of the last year or so simply be explained by the firing of the least productive workers?<<

Yes, that's theoretically possible. (And it was probably true for Britain in the early 1980s.) But not in the U.S., not over the past several years.

Posted by: Brad DeLong on December 6, 2002 12:05 PM

>>Thoughts would be welcome on why American productivity appears so much more robust since 1994-1995 than European or Japanese productivity.<<

There seem to be medium-sized differences in the relative propensities to invest in high-tech equipment, and large-sized differences between the effectiveness and usefulness of high-tech equipment when installed in the services--especially in the wholesale and retail trade parts of the services--sector.


Brad DeLong

Posted by: Brad DeLong on December 6, 2002 12:07 PM

>>Will: Of course productivity goes up when Boeing outsources - that's what outsourcing is for!

I thought Will's main point was about the simple productivity-accounting effect that outsourcing would have i.e. with unchanged sales and fewer workers, measured productivity (sales/output in his measure) rises, regardless of the possible efficiency benefits of outsourcing.

Posted by: Michael Harris on December 9, 2002 11:43 PM
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