Thursday, June 4, 2009

Promising Productivity Update

The BLS updated its productivity estimates for 2009 Q1, and reported the results this morning.

Productivity -- output per hour worked -- has risen almost every quarter of this recession. That doesn't always happen in a recession.

Nevertheless, if there were a reduction in hours worked without any fundamental change in productivity, then we would expect output per hour to rise because of diminishing marginal product of labor. Thus, it is helpful to know what productivity would be if hours had not changed -- that's what I call the productivity residual (conceptually similar to the Solow residual used in macroeconomics).

The chart below (an update of Figure 5 in my NBER wp) shows the productivity residual in this recession and four previous ones. The productivity residual clearly fell 2008 Q3 - Q4 -- that is productivity has not risen as much as you might expected given the drop in hours. However, the BLS release today suggests that the productivity residual hardly fell 2008 Q4 - 2009 Q1 and remains significantly higher than it was when the recession began. The two worst quarters of this recession are not near as bad (in terms of productivity residuals) as the two worst quarters of 1981-82.

Time will tell whether the productivity residual rises or falls 2009 Q1 - Q2.

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