Productivity is slipping

This morning the Department of Labor will be issuing its U.S. job productivity figures.  The numbers are expected to show a decline in the efficiency of U.S. workers.

Analysis: Much may be made by the press about slipping productivity.  However, I am not that concerned.  Almost two years ago I had said that when the U.S. economy emerged from recession that productivity was likely to surge.  This is more because of the way the statistics are calculated than because of any real change in the verve and creativity of the average workers.  Productivity is measured as “output per hour” divided by number of employees.  Because employers typically fire so many people in recessions, as revenues (i.e. output) return, productivity “surges.”

I also stated that these kinds of productivity gains are unsustainable.  That’s because you can only ask people to work so intensely for awhile.  Thereafter, people become exhausted, or they begin to resent the extra work and responsibility without commensurate increases in pay.  Well that’s likely what is happening right now.  U.S. businesses are anticipating further economic decline so they are being stingy in both increasing pay and in hiring new employees.  Consequently, productivity is going to fall.

Another less likely reason for the decline in productivity is that businesses actually are hiring more employees without a similar increase in revenues.  That would also cause the productivity figures to decline.  However, the employment data seems to suggest that most businesses are holding steady with their headcount.  Not only that, but personal income growth is basically flat.  Thus, the former scenario I described above is the more likely situation.  So…

In other words, we are still locked in the game of chicken between consumers/employees and businesses/employers.  Unfortunately, without movement by either party, another recession is almost inevitable.

Importance grade: 6; while the change in the productivity trend was fairly easy to predict, that businesses likely still are not hiring or increasing pay is potentially ominous.

Jason