Thursday, February 5, 2009

Productivity Marches Ahead

Today the BLS reported productivity -- that is, real output per hour worked -- for Q4.

It continues to grow, as shown in Figure 6 below (these are figures from my paper "What Caused the Recession of 2008? Hints from Labor Productivity"). Interestingly, the more severe recession of 1981-82 had productivity falling, as did the Great Depression (not shown).

The conventional wisdom ignores the comparison with previous recessions, and says that productivity falls merely because labor hours are falling. That is incorrect. I prove this by calculating a "productivity residual" -- the amount of the productivity growth that cannot be explained by the fact that labor fell. The productivity residual has been rising in this recession -- much like it does during non-recession times.

Productivity residuals are shown in Figures 5 and 7 (productivity residuals are measured in the quantity dimension so that they can be compared with changes in the amount of labor). The 1981-82 recession had the productivity residual falling (that is, given that jobs were lost in that recession, productivity should have risen but in fact it fell -- so the productivity residual must be falling). So did the Great Depression.


Unknown said...

Couldn't it be that people that did not lose their jobs are working harder so that they don't get fired? Maybe it's more microeconomics then macro. But I don't even know how to prove it.

Boonton said...

Or that if you have to cut your workforce you are going to start with the least productive.

Imagine a car dealership. Each salesman works 5 days a week and their sales are:

A 10 cars
B 8 cars
C 5 cars
D 3 cars
E 1 car
F 1 car

Your payroll is $6,000 a week and you're selling 28 cars. Productivity is 4.67 cars per salesman.

Now you layoff E and F. You're left with only 4 salesmen and 26 cars a week. Productivity has now surged to 6 cars per salesman. That's a whopping 28.5% increase! But only on paper, your dealership is selling fewer cars and has fewer workers than it did before the downturn.

Unknown said...


I think the hard work - productivity link is probably weak.

My first guess would be to look at sector composition which can contribute a lot. If the jobs are lost in industries with slower productivity growth the this can increase in the productivity growth rate.

My second guess would be to think about interest rates and net product. I haven't thought about it enough but I wonder if rising interest rates would cause a bigger gap between gross and net product calculations.

That is, is this an artifact of the way the data is put together. I don't have a real hypothesis here, I just wonder.

The third is to think about how the economy has changed in the last 3 decades. It is interesting that productivity rose in the last three recessions. Does this have something to do with manufacturing vs. service.

Maybe that manufacturing slowdown results in plant shutdowns. I don't know.

I don't quite know how we reconcile voluntary reductions in employment with rising unemployment numbers, however.