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U.S. Productivity Increase - A Sign Of Weakness?

Inflation Alarmism
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EDITOR NOTE: Did you know that last week’s productivity report showed average wage growth jumping an astounding 20% in just one quarter, an increase not seen since after WWII? You’d think, based on the headline figures, that people got raises. If so, you’ve been misled. Wages jumped because many of the lower-wage employees have been laid off. So, in this case, wage growth is a direct result of a “contraction” of employment. And no, people across the board didn’t get raises, despite what the numbers might have you assume. So, does this increase in productivity and income reflect economic improvement? We’d say that it actually reflects stagnation, if not further decline.

Amid the gloom of the coronavirus recession, even the good economic news tends to be bad. Take productivity. Its growth is soaring to rates not seen in half a century. Wage growth is accelerating, too. Normally, this would be a cause for celebration.

Not now. Improving wage and productivity statistics are actually a sign of underlying economic weakness.

Government statistics released last week show that hourly compensation — defined as wages, salaries and benefits — increased by 20% in the second quarter of 2020, a post-World War II record. Other measures of compensation show similar increases. This spring, the average wage of nonsupervisory workers in the services sector and production workers in the manufacturing sector increased by 7.7% in April, 6.6% in May, and 5.4% in June relative to the same month in 2019. Over the previous five years, average wage growth by this metric was a much slower 2.7%.


Statistics like these are heavily influenced by the type of workers who have jobs in any given month. Normally, that doesn’t change abruptly. But in the sudden and deep pandemic contraction, aggregate statistics can be misleading. Average wages aren’t growing because individual workers are getting raises. Instead, they are growing because so many low-wage workers have been laid off.

In normal times — as documented in a new paper by economists Erin E. Crust, Bart Hobijn and Mary C. Daly, president of the Federal Reserve Bank of San Francisco — about 7% of workers with full-time jobs stop working in a given month. In May 2020, by contrast, 17% of full-time workers either became unemployed or left the workforce.

Crust, Daly and Hobijn show that low-wage workers have borne the brunt of recent job losses, with workers in the bottom 25% making up about half of all workers who transitioned out of employment. This will have a big impact on measures of average wages, because when a relatively large share of low-wage workers stops working, the average wage of workers increases even if nobody who remains employed earns an extra penny.

To measure wage growth while addressing these large changes in the types of workers who have jobs, the economists computed gains in nominal median usual weekly earnings among workers who had been continuously employed over the previous year. They concluded that wage growth in the second quarter of 2020 among continuously employed workers was about one-fourth as fast as the economy-wide gains that are captured by the overall rate.

Furthermore, they concluded that wage growth has slowed, not quickened. Among continuously employed workers, they calculated that wage gains are 2.4 percentage points lower than they were at the end of 2019, while the headline statistics show an acceleration of 6.4 percentage points.

The most important factor influencing wages is productivity, with more productive workers commanding higher wages. So it’s not surprising that rapid statistical increases in productivity accompany the apparent wage gains.

Government data released last week show that productivity grew by a stunning 10.1% annual rate in the second quarter of 2020. Since the end of World War II, the U.S. has experienced only six quarters of double-digit productivity growth, including this spring. The only quarter in the past 50 years to top 10% productivity growth was the first quarter of 1971, at 12.3%.

This record-setting good news is caused by record-setting bad news. Productivity is measured as goods and services produced per hour of work in the nonfarm business sector. Economic output declined in the second quarter by 37.1%, and hours worked declined by 42.9%. Both contractions were the largest on record since 1947, when the data were first collected.

In good times, productivity increases are a sign that additional capital investment, new technology or new management techniques allowed workers to produce goods and services more efficiently. Now, though, productivity growth is soaring because hours worked declined more rapidly than economic output when the economy went into free fall. That, in turn, was probably caused by less productive workers being the first to lose their jobs.

At the same time that overall productivity (in the nonfarm business sector) shot up, manufacturing-sector productivity fell at a 14.6% annual rate, by far the largest quarterly decline since the data began in 1987. (The previous record was the 6.1% drop in 2008.) Of course, manufacturing workers didn’t suddenly forget how to do their jobs. Instead, output fell by 47% in the second quarter and hours of work fell by 39%.

As the economy continues to recover and the U.S. puts some distance between itself and the second-quarter economic free fall, the recession’s effects on wage and productivity statistics will normalize. Productivity and wage growth will be sluggish as lower-productivity, lower-wage workers become re-employed over the next few years.

The composition of the workforce will continue to be affected by the recession, perhaps with a larger share of younger workers opting for continuing their educations instead of entering a weak job market, and with a larger share of older workers delaying retirement to repair their household balance sheets. Both would affect aggregate wage and productivity trends.

Last quarter’s soaring productivity gains do not reflect individual workers becoming more efficient, and rapid wage growth does not indicate individual workers earning more. Instead, both reflect underlying economic weakness. That weakness will abate as the economy recovers.

But the recovery would be faster if Congress provided additional support — not despite the good news from economic statistics, but because of it.

Originally posted on Yahoo! Finance

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