Tuesday, August 10, 2010

The Dark Side of Productivity

Nonfarm business productivity declined 0.9% in Q2, following an upward revised gain of 3.9% in the first quarter; on a year-on-year basis, the series is up also 3.9%. Given that the productivity numbers are notoriously volatile on a quarterly basis, year-on-year comparisons should generally be viewed as more valuable.

Productivity usually rises sharply in the early phase of the business cycle, reflecting the sharp adjustments to the business sector's operational costs during a recession. This is a typical phenomenon that is described by the term "cyclical" productivity gains to differentiate it from the longer-term, "secular" trends of that measure.

Inasmuch as it is a much desired outcome for any economy to experience strong productivity gains of either kind (while, admittedly, the secular gains are generally considered more important), the flip side of robust productivity increases is that it represents an impediment to job growth. The concept here is that businesses can produce the same amount of output with less production resources- labor being a key such input.

So, against that backdrop, the views expressed last Friday by the head of the National Bureau of Economic Research, Robert Hall, that the slow pace of job creation may simply reflect strong productivity gains (http://www.bloomberg.com/news/2010-08-06/nber-s-hall-says-faltering-jobs-data-don-t-imply-another-u-s-recession.html) merits serious consideration.

The average productivity gain in the last five quarters (including the presumed last quarter of the recession in Q2 2009 and the first four quarters of the economic recovery since then) has been a stellar 4.9%, compared to gains of 3.7% in the comparable periods associated with the previous two recessions (2001 and 1990-91). One can argue that this was, to some degree, to be expected, given the severity of the last recession that may have led to somewhat stronger productivity efficiencies. Still, even if there is something to this argument, it does little to change the basic problem that the robust rise in productivity in recent quarters is an obstacle to a faster pace of job growth.

The trouble is that the above argument cannot be fully validated in real time, given that the productivity series is famously revised, often quite substantially, a long time after the quarterly data are released. The benchmark revisions of the series can sometimes alter very materially previously perceived productivity patterns. As a result, some caution would be prudent here before any unconditional adoption of this argument. However, with apparently solid productivity gains underway and private payroll growth frustratingly slow but not negligible, there is very little space open for any double-dip scenario to materialize.

Anthony Karydakis

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