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Productivity Declines in the US

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Productivity Declines in the US

Productivity Declines in the US

Aug 12 2015, 08.40am GMT

STOCK.com

The U.S. Labor Bureau reported on Tuesday that nonfarm business sector labor productivity increased at a 1.3% annual rate for the second quarter of 2015.

Productivity measured year-on-year over the same quarter of 2014 showed an increase of 0.3%, reflecting an increase in hours worked of 2.8%, and in output of 2.6%.

Labor productivity, or the output per hour, is arrived at by dividing an index of real output by an index of hours worked by all individuals including employees, proprietors and unpaid family assistants.

Meanwhile, the hourly compensation, during the second quarter, increased by 1.8 percent.

The productivity increase of 1.3% compares very unfavorably with the long term rate of 2.2% over the period 1947 to 2014. Productivity in 2013 was particularly weak having recorded negative figures for three of the quarters in that year to finally show an annual gain of 0.9%.  The last time that productivity was at a negative for three quarters was in 1982.

Productivity is defined as an economic measure of output per unit of input where input includes labor and capital while output is usually measured in revenues and similar GDP components such as inventories. Detailed evaluation of productivity numbers allows an examination of trends in labor growth, wage levels and technological development.

Higher productivity is considered to be an essential component to move to a higher standard of living over time as it has the effect of increasing wages as well as company profitability.

Chief U.S. economist at Capital Economics, Paul Ashworth attributed the U.S. productivity slump as the major contributor to the economic problems facing the country.

Ashworth said, “The topic is still getting almost no attention - particularly among presidential candidates - but there is a case to be made that the stagnation in productivity has been more damaging to the living standards of Americans than the Great Recession.”

The weak underlying trend in the production numbers suggest that inflation could increase more rapidly than economists have anticipated up to now.

Also, Gennadiy Goldberg, an economist at TD Securities in New York said, “what it means is that inflation could be more problematic down the road, but we haven’t seen it yet. It’s something to think about long term.”

Meanwhile, Federal Reserve Vice Chairman Stanley Fischer recently mentioned the low inflation rate as a factor that might delay an interest rate hike while the potential for an increase in the rate of inflation as suggested by Goldberg, could alter that view. Productivity is another important metric watched by the Fed as productivity has a direct bearing on GDP growth which is slowed by low productivity numbers.

Fed Chair Janet Yellen had described the productivity numbers since the recession as “disappointing” even before the latest downward revisions.

The weakness in the growth of productivity could influence the Fed to raise interest rates in September, in an effort to encourage economic activity and subsequent growth in the GDP.

The debate among economists around the causes of the low productivity has identified causes such as low capital investment while others question the actual accuracy of the data.

A contrary view as to the cause comes from Joel Naroff, President of Naroff Economic Advisors, who says that workers have discovered in the current expansion that working harder doesn't mean more money.

Naroff added, “If firms want to drive up productivity, they will have to do it the old fashioned way, by providing incentives to work harder.”

It could once again be a case of “Money is the great motivator” as the spur to increase productivity.

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