The Productivity Surge

A Mixed Blessing


Productivity  surged in the second quarter–up 6.3 percent in the business sector and 6.4 percent in the nonfarm business sector. These were the largest increases since the third quarter of 2003. Rising productivity is a blessing. It's a mixed blessing during periods of high unemployment, however, since the alternative is higher employment.

Total output equals output per hour worked times the number of hours worked. Since we are talking about hours worked by labor, productivity refers to labor productivity. Higher productivity means a higher standard of living. It means that the labor pool is producing more each year than the year before. Put another way, workers generate more output on average.

Sometimes output per labor hour worked rises because workers become more skillful or experienced or educated. However, ironically, most significant advances in labor productivity comes from labor saving technology. The productivity of a construction worker using a shovel can't match the productivity of a worker using heavy earth moving equipment. Generally, the productivity of labor rises because of more capital per worker, or fewer workers for a given amount of capital.

It once took 90 percent of our work force to produce enough food for the nation. Now fewer than 2 percent of our work force produces more food than our national requirement. The rising ratio of capital to labor in farming  is behind this enormous increase in labor productivity.

The same process has been going on in manufacturing. For decades we have been manufacturing more and more goods with fewer and fewer workers. Labor saving capital

equipment has made this surge in productivity possible. This is the story of progress, although the contemporary focus is usually on the "loss of good manufacturing jobs."

The extreme of this process is captured by the story of the factory of the future. The factory of the future will have only two workers, a man and a dog. The man's job is to feed the dog. The dog's job is to keep the man from touching the computers.

From the early 1970s to the mid 1990s productivity increased approximately 1.4 percent per year. From the mid-1990s into the early 2000s, that growth rate doubled to 2.8 percent per year. That differential made a huge difference, especially when compounding is considered. Output doubles in half the time, with a roughly comparable increase in our standard of living.

The recent 6 percent plus surge in productivity in the first quarter was a blessing; however, it was a mixed blessing, given the high level of unemployment. In fact, the increase was not because output increased faster than hours worked, but because hours worked fell faster than output. We've got to turn that around.

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  1. “In fact, the increase was not because output increased faster than hours worked, but because hours worked fell faster than output. We’ve got to turn that around.’

    I take this as evidence that we’ve been in a low grade form of debt-deflation, and is predicted by Fisher’s model.