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Productivity

August 21, 2011

New productivity numbers came out from the Bureau of Labor Statistics earlier this month and befuddlement set in among economists. Productivity has swung around, as in gone negative.

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Peter Radford, a wonderful economist who blogs at Radford Free Press and Real World Economics Review, put it succinctly on August 9.

This morning’s data are far from rosy: productivity declined 0.3% in second quarter, while it was revised to a decline of 0.6% in the first quarter from what had originally been reported as a 1.8% gain. This is not good. This makes two successive quarters of decline which we hadn’t seen since 2008. Moreover, productivity has crawled up a mere 0.8% over the past twelve months, which is another bad performance and a sign of things being out of kilter deep within the economy.

When productivity spiked during the economic collapse and the wholesale loss of jobs, economists and everybody else knew exactly what was going on. Employers were cutting and existing workers were in a fever to keep their jobs. The conveyor belt was moving faster. Well, unemployment is still high and productivity is now declining.

Radford continues with an effort at unravelling the Gordian knot. Tyler Cowen, a not as good economist,from George Mason completely whiffed on the subject in his interview with Jeff Sommer on the Weekend Business podcast. BLS includes with its statistics a breakout of the mysterious “multi-factor productivity,” which is code for “We assume capital improves productivity, so anything else is everything else. And we can’t say it quite so baldly, so we’ll give it a technical sounding name. Multi-factor productivity.”

Instead, as did Alexander, it is necessary only to slice through the knot. Which we did in early 2010 when we published under the title: “Multi-Factor Productivity Solved

For some reason, we used a rule of 7 back then, but now we use the Rule of 8.” Eight minus the unemployment rate equals the rate of productivity increase. A nearly perfect correlation.

Why this relationship was not discovered prior to us is likely the simple fact that nobody went looking for it. Oh, AND it is masked by the fact that contemporaneous numbers do not show this simple relationship, and often diverge from it wildly. But as you can see on the blog, the trendline for the unemployment rate has a sinuous mirror image in the trendline for the rate of productivity increase. So in the medium and long terms, described by these trendlines, if you can estimate the unemployment rate, you can estimate the rate of productivity growth or decline.

And we did go looking for it. We suspected that low unemployment would make managers manage and workers find efficiencies. We also follow Adam Smith to the extent we see efficiencies in the specialization of labor, which obviously has a better chance with more workers, as the more skilled may be shifted to the more essential tasks.

Adding tools, as is encouraged by the concessionary tax breaks for investment these days, can help, or it can simply be a bad idea. Better to add tools when unemployment is low and let your workers incorporate them as appropriate.

Again, we have shown in a simple graph that productivity is a mirror image of the unemployment rate. The higher the unemployment rate, the lower productivity. The lower the unemployment rate, the higher productivity. Keep it down out there. I can hear you yelling. No. It is not in the contemporaneous statistics, when very often the numbers go in exactly the opposite direction.

BUT, if you simply graph the trendlines, as we did, you will see what we saw, a perfect mirror. We provided the mathematical equation: 8 – U = P. No second derivatives. Not even a coefficient.

You will notice that the graph published in 2010 is of a slightly different shape. That earlier chart depended on statistics for all businesses. In order to get to the most current data, we had to use non-farm businesses.

A footnote. The productivity of government workers is not considered by the BLS or anybody else, because their output is assumed to be their input. Here, Cowen has a good idea when he notes that purported productivity increases in the health care field are inappropriate because they do not consider health outcomes. It is not rational to say that a health care system which produces poorer outcomes than the rest of the industrialized world,at twice the price and with half again as many people, or more, has any real connection with high productivity, no matter how much it makes for the corporate owners.

So, the forecast for productivity growth? Bouncing along below the bottom, averaging negative one to negative two for the next year. That follows from our projection of the unemployment rate at nine or ten or higher. But we’re not forecasting unemployment today. That’s next week.

Does it mean bad things for industry? No more than the collapse in demand for products. Nor the threatened slashing of government deficits. Workers, insofar as their wages and salaries are connected to productivity, will continue to see their incomes erode.

FORECAST:

Now reminding you of the general shape of our forecast for the year, bouncing along the bottom with downside risks from the European debt crisis and from domestic commercial real estate slash local and regional banks. Negative growth in the second half of the year. This forecast issued back in January. Another financial crisis was a nontrivial possibility.

We’re seeing those risks play out in Europe, with the necessary restructuring of sovereign debt being delayed and the big banks sweating out that inevitable outcome for the damage it will do. Solvency in these banks depends on avoiding the inevitable. The European Union, the political umbrella for Europe is not constituted in a way that can solve the problem. The European Central Bank, the principal institution of the eurozone, is constitutionally the same as Bundesbank, with its only mandate to hammer inflation or the shadows of inflation or the hints of shadows of inflation. The current crisis is unexpected only because it was so easy to see coming and we wonder why nothing was done.

Domestically, with the petering out of the stimulus has come the petering out of the growth. Government stimulus will turn negative in a big way with cutbacks in state and local employment about to surge. Huge federal deficits and historically unprecedented zero percent interest rates for now on three years have created a puppet theater recovery which everybody bought into until recently. Our view is that there has been no recovery and another leg down is now in progress.

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