U.S. worker productivity continues to increase

By Money Matters Editors

An experienced economist will tell you that for almost every economic statistic there’s an upside…and a downside.

And that’s perhaps no truer than with U.S. worker productivity. Another way of putting this is, to paraphrase the great writer Charles Dickens, ‘It is the best of times, and the worst of times for the American employee.’

The best of times: In Q2, the American worker, already the most productive in the developed world, became even more productive, with U.S. worker productivity increasing at a 6.6 percent annual rate – a six-year high, according to the U.S. Labor Department. During the quarter, hourly compensation rose just 0.2 percent, with unit labor costs – a key indicator of inflationary pressure, and one watched closely by the U.S. Federal Reserve – plunging 5.8 percent – its largest decline in nine years. In other words, American employees are more productive now – on an output per unit cost basis – that any time in the modern era.

What's more, in the past year, productivity is up 1.8 percent, while unit labor costs have dropped 0.6 percent.



The above productivity statistics, in and of themselves, are the stuff of a movie marquee – a major economic accomplishment. But the above comes on the heels of three decades of increasing worker productivity – including the super-productivity era of the Roaring 1990s.

For those investors less familiar with the statistic, productivity measures output per hour worked. Economists say rising productivity usually leads to increases in income, as businesses can increase salaries/wages paid without increasing their per unit costs. While quarterly productivity statistics are important, most economists focus on the longer, 12-month trend, as it’s more indicative of overall efficiency and output strength. Moreover, the increased productivity in the past 12 months is a major reason why so many S& P 500 companies were able to exceed earnings estimates in Q2.

U.S. productivity averaged about 2.7 percent during the 1948-1970 period, then slumped to 1.6 percent in 1971-1995. However, starting in 1995 the technology revolution driven by the personal computer, microprocessor, and the Internet, among other breakthroughs, propelled a large increase in productivity to about 2.5 percent per year. The remarkable productivity rate helped create the record earnings and rising real, median incomes that characterized the “Roaring 90s,” so says economist Peter Dawson.

The worst of times: Now, investors may legitimately ask – what could possibly be bad about large increases in worker productivity? In the aggregate, or looking at ‘the big picture’ – nothing: strong economies and nations continually increase productivity.

The problem occurs at the individual level: short-term, it reduces the pool of jobs available in the economy. Add a cyclical down turn (lay-offs), and structural changes in the U.S. economy prompted by globalization (the transfer of jobs to lower-cost production centers overseas), and the result is? You guest it – a severe shortage of jobs in the U.S. economy. Right now, the U.S. economy is short about 12-14 million jobs, depending the methodology one uses.

Further, most investors know what a shortage of jobs leads to: high unemployment, (currently 9.7 percent in the U.S.) and, as the above Labor Department data indicates, little bargaining power for a wage increase for workers in many job categories. And we know that when wages don’t rise or if they fail to keep pace with inflation, consumer spending lags, and that’s exactly what has happened in this recession. (The increased U.S. savings rate during the recession has also put a lid on consumer spending.)

So while long-term increased productivity is good and essential, short-term it does have a down side.

Economic Analysis: So what’s the solution to productivity’s two-edged sword? In the past it has always been the U.S. economy’s remarkable ability to adapt, to renew and reinvent itself – to discover/identify new sectors of growth that create jobs.

And that’s what must occur in the quarters and years ahead - the discovery of new engines of growth - for the United States to remain a strong, versatile, and prosperous nation with ample economic opportunities.