Productivity: Fact or Fancy?

December 3, 2008

No economic concept is more closely related to changes in the standard of living than productivity, output per man-hour of work. GDP has two parts, productivity and hours worked. If output only rises in tandem with the labor force and the rise in hours of work, per capita GDP, akin to the standard of living, remains stalled.  The growth in productivity can be increased through a combination of investment in infrastructure, technology, plant and equipment, and human capital (i.e. education). Faster productivity means a faster non-inflationary speed limit for growth at times when an economy is employing its resources fully.  Economists and politicians are thrilled when they observe a spurt in productivity growth such as the one that developed in the 1990’s. In recessions, productivity tends to weaken and at times even contracts, so the thrill was sustained when productivity proved atypically resilient during the dot-com recession at the start of this decade. The same phenomenon has characterized the current U.S. downturn. Instead of being revised down as anticipated, U.S. productivity was revised upward for the last quarter and averaged 2.4% in the middle two quarters of 2008.  Strong productivity holds down unit labor costs, which rose just 1.4% between the third quarters of 2007 and 2008, a period entirely consumed with a malfunctioning financial system.

The sequence of a surge in productivity followed by the longest recession since the 1930’s and possibly the deepest too is a puzzling juxtaposition. Could it be that fast productivity growth means less than it’s cracked up to be? The field of economics is filled with beliefs that get debunked by a later generation of practitioners. Is productivity measured properly?  Could it be that market investors cannot handle the abundant harvest of a productivity upsurge, so irrational exuberance, corrupt greed, and lax public oversight inevitably result?  Maybe the 1990’s were never really so good. The size of the economic pie grew, but its slices became far less regular in size and shape. Or perhaps, it’s just a coincidence that a golden age for the economy — and that holds for the world economy as well — was followed so quickly by a shipwreck, although I tend to doubt that answer. It’s no accident that the Bible talks about seven years of plenty being followed by seven years of famine. The world economy is replicating a very old pattern. I have more questions than answers here. There certainly appears to be plenty of grist for a Ph.D. dissertation to examine why the spate of excellent productivity growth did not better protect the U.S. economy from its current difficulties.



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