A note on US productivity

Daniel Wilson of FRBSF has a nice note on the topic:

Labor productivity, defined as output per hour of labor, unexpectedly stalled in the second quarter of 2010, falling by a 1.1% annual rate in the total business sector based on data available through the end of August. This follows 2½ years of generally strong productivity growth, which started when the recession began at the end of 2007. In fact, the annualized 2.5% pace of labor productivity growth during the latest recession, which appears to have ended in mid-2009, was the fourth strongest of the 11 recessions since World War II. Post-recession, from the third quarter of 2009 to the second quarter of 2010, productivity grew at an even faster annual pace of 2.8%, even with the second-quarter drop. This strong growth is one reason for the scant downward movement in the unemployment rate despite moderate GDP gains. Businesses have been able to meet demand for their products and services without hiring new workers or increasing the hours of current staff because they are managing to get more from each hour of labor.

Recent rapid gains in productivity beg the questions of where the growth is coming from and whether it is sustainable. They also raise the question of whether the second-quarter drop was just a temporary blip in an otherwise strong productivity trend or the start of a significant productivity slowdown. The strength of the labor market recovery hinges on the answers to these questions. Many forecasters have predicted moderate GDP growth and a reasonably strong recovery in employment over the next year or two. Such a scenario would require a sharp slowdown in productivity growth to about 1% or less.

This Economic Letter examines the risks to this forecast, first looking at how productivity growth has fared in past recessions and recoveries. Then it considers where recent gains have come from. For example, do they reflect more physical capital relative to labor hours, increases in labor quality, or efficiency gains? The findings suggest that productivity growth for the next year or so might very well exceed forecaster expectations, which would put a damper on employment gains.

Debate on unemployment just keeps getting interesting. More to follow later.

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