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Thursday, August 09, 2012

Productivity Improves, But Still Under-Performs

Productivity for 2011 and in the first quarter of this year was, quite simply, poor. The numbers released on August 8 for the second quarter of 2012 were better than the first quarter, but still not exactly robust.

Keep in mind that we’re talking about nonfarm business sector labor productivity. This output per hour is calculated by dividing an index of real output by an index of hours worked.

Post-World War II, labor productivity growth has averaged 2.2 percent. But productivity only grew by 0.7% in 2011, and by -0.5% in the first quarter of 2012 (annualized rate) and 1.6% in the second quarter. That 1.6% increase reflects 2.0% output growth and a 0.4% increase in hours worked.

Productivity improved strongly in 2009 and 2010, which was a requirement given the down economy and lost jobs. The last time that the U.S. combined solid real GDP growth with strong productivity growth was in 2004. We also saw that combination in the late 1990s and mid-1980s. The ideal scenario is to experience strong GDP and productivity growth. But that certainly has not been the case in recent years.

In the end, productivity matters a great deal to both businesses and workers. Enhanced productivity obviously benefits business owners, boosting their bottom lines. And it’s good for workers, whose incomes ultimately are tied to their level of productivity.

Looking ahead, labor productivity is tied to business investment. Indeed, contrary to popular assumptions, there is no conflict between labor and capital. They need each other, and that includes capital investment that makes labor more productive. To boost both GDP and productivity growth, the U.S. needs to remove uncertainties and reduce costs – thereby, enhancing incentives for – private sector risk taking, namely, entrepreneurship and investment.

Raymond J. Keating
Chief Economist
SBE Council

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