The Productivity Conundrum... Again

Here we go again...

US worker productivity unexpectedly accelerated in the first quarter and helped curb inflation as companies showed no loss of output with fewer employees.  Productivity, a measure of worker efficiency, rose at a 2.2% annual rate after a 1.8% gain the prior quarter, the Labor Department said.

Among manufacturers, productivity rose at a 4.1% pace from January through March following a 4.2% gain in the fourth quarter.

Something to cheer about, right?  Especially in light of the so-called recession?  Couple that with the ongoing rise in U.S. manufacturing output and you have the makings for a great manufacturing economy.  But of course there's the other side of the productivity coin...

Hours worked dropped at a 1.8% pace, the most since the first quarter of 2003, today's report showed.  US employers cut payrolls in each of the last four months, bringing the total number of jobs lost this year to 260,000.

Output up, productivity up, therefore jobs must go down.  Everything must balance.  Really?   

The easy way out would have been for productivity to increase at the same rate as demand, whether that demand was driven by pure population increase or higher purchasing power.  Therefore the presumption with the decreasing jobs number is that we've been too good.  Productivity has increased faster than demand, thereby not balancing the jobs side of the equation.

But wait a minute... what about the unemployment rate?  It has crept up slightly over the past couple quarters, but it is about what was considered "full employment" during the economic meltdown of the 1970s and even lower than at the end of the Clinton administration.  Taking a look at employment by state and you see another clue.  Michigan is dead last in 51st place (yes, that through me for a loop at first until I realized that CNN apparently thinks DC is a state). 

There's a probable reason for that, if you take a look at Michigan's tactics toward employers.  You'll note that the states at the top of the list are either very business friendly or they have a preponderance of guaranteed government jobs.  Guess what... business employs people, business pass costs on to consumers and increased costs reduce employment and may even force a business to relocate, people pay taxes that support state governments.  So if you look at the current position of state budgets... wow... correlates nearly perfectly with the state unemployment rate... and state tax rates... in reverse.

Am I the only one that thinks the solution is just a little too obvious?  Want to spurr demand to employ more people to balance government budgets through increased taxes, with that increased employment offsetting increased productivity?  Make it easier for business.  Or you can just continue to pound away at "excess profits" (ever compare the profit margins of oil companies versus the likes of Microsoft or even your local 7-11?  Don't get me started on that public misperception...!) and wonder why employment drops and budgets don't balance.   

By the way, for those of you curious about the impact of outsourced or offshored intermediates on the productivity equation, take a look at our multi-post investigation of this anomaly, which after discussions with some leading economists concluded that the effect was rather small.

 

Comments

[Mark Graban]

Did you see where Tax-achusetts wants to tax the "excess endowments" of colleges (anything over $1B), including Harvard. Maybe Harvard will pick up and move its intellectual resources to a more business-friendly state??

http://www.boston.com/bostonglobe/editorial_opinion/editorials/articles/2008/05/09/how_to_strangle_an_economy/

[Karen Wilhelm]

Productivity, as reported by the US Dept of Labor is so oversimplified that it becomes misleading. It's just total production in dollars divided by the workforce, or some segment thereof. More production with the same number of people, or same production with fewer people. Capital investment reducing employment is an increase in productivity -- sorry, manufacturing engineers, you eliminate jobs, although that might be accomplished through attrition in better companies. Overtime that loads more work on the same number of people is an increase in productivity. Maintaining production while conducting massive layoffs is an increase in productivity, even though the "better" ratio is a matter of coasting. Problems maintaining performance are delayed reactions.

American workers work hard. They always have. But the DOL statistics give us a misleading figure, unless you dig down deeper into what they are reporting.

Be careful what you measure.