Productivity and Job Growth

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As noted in my previous posting, productivity growth is the key to sustainable long term economic growth. But the productivity data needs to be looked at with a careful eye. And not all productivity growth in the short run helps with other economic issues, such as employment. The Wall Street Journal's Real Time Economics blog raised this point yesterday in a posting "Productivity Surge May Hurt Job Growth, Fed Paper Says". The posting describes a study by two San Francisco Fed economists Mary Daly and Bart Hobijn on Okun's Law and the Unemployment Surprise of 2009. The study found that:
In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun's law. If Okun's law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.
So, productivity is bad for employment - right? Not necessarily. It is not uncommon for productivity to rise in a downturn. Remember that productivity is a measure of output per unit input. In times of growth, productivity measures how much additional output is generated per input. In a recession, companies frequently shed the least productive inputs first while trying to at least hold output steady. If inputs shrink faster than outputs, productivity rises. As the paper notes:
Some of the surge in productivity growth in 2009 was likely due to such cyclical factors as layoffs of least productive workers, greater intensity of work effort, and shifts away from producing intangible capital, which is not measured in output statistics.
Thus, the short term productivity increase may have little to do with increased investments in knowledge, technology, business processes, and other intangibles. Those investments still need to be made if, from a long run perspective, will want to see productivity increases creating growth and employment.

But, as the paper warns, "Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy." As a result, the link between GDP growth and employment is not as strong as it was. This result is also evident in the decade long stagnation of wages and the pattern of "jobless" recoveries. In every recession in the past few decades has resulted in structural adjustments, not just cyclical changes. Workers are not on temporary layoff subject to recall--jobs are permanently eliminated.

Such a shift in economic structure and business strategy is part-and-parcel of the shift to the I-Cubed Economy. It is one that we need to build new labor policy mechanisms to address.

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This page contains a single entry by Ken Jarboe published on March 9, 2010 9:38 AM.

Deficits, growth and intangibles was the previous entry in this blog.

Education's common core is the next entry in this blog.

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