This Could Actually Help

September 1st, 2011 at 6:38 pm

No, I’m not cheering the fact that productivity growth has turned negative over the last two quarters.  But I am saying it could actually help on the jobs front.

The figure shows productivity growth—output per hour—over the past four quarters (annualized quarterly growth rates).   Productivity measures real output per hour–it’s broadly telling us how much stuff we can produce in an hour.   In this regard, it’s closely linked to living standards, and the production of more goods and services per hour–productivity growth–is the main way economies advance.

There are, of course, portentous distributional issues—in recent decades, the benefits of productivity growth have done an end run around middle-class and lower-income families.  But without it, society is clearly worse off.

So why am I at least a little glad to see those last two bars go below zero?   Because it may mean that employers may actually have to break down and hire some people!  Imagine that.

In recent years, when demand has been as weak as it is right now, employers will do everything they can to meet the demands they face without adding workers.  That leads to jobless recoveries, as output is rising but employment isn’t, which also shows up as faster productivity growth.  However, even with low levels of demand, there comes a point when employers can’t squeeze anymore productivity juice out of their workers.

That may be what we’re seeing here as output rose more slowly than hours worked in the last two quarters.   That usually signals firms need to bring more people on if they want to raise output to meet even relatively low levels of demand.

Of course, if demand—GDP growth—remains as low as it’s been, then they’ll just cut hours to get them back in line with growth, so this could go either way.  It’s another reason why the President’s jobs plan is so important right now.  If firms have truly exhausted the squeeze factor, then improved demand will translate in more hiring.

Source: BLS


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2 comments in reply to "This Could Actually Help"

  1. Dan Furlano says:

    If businesses are not growing demand and reducing costs in other areas like wages and benefits then won’t you also get a “lower” productivity number (few products same hours)?

    The economy is slowing down i can’t see this as being a good thing.

  2. Ralph H. says:

    2 things
    #1.People need money to spend (tax breaks for the wealthy won’t boost demand of any product).
    #2.When was the last time the US was seriously on the cutting edge of product development? Stop making weapons and war our largest export and put more money out for R&D…let’s stop losing our best minds to the highest bidder overseas.