Productivity Is Worse Than You Think

Alan Blinder laments the slow growth productivity that’s dogging the economy:

Attention nowadays is focused on the degree of slack in the U.S. labor market. The financial news is full of stories about payroll employment, the unemployment rate, labor-force participation rates, quits, initial claims for unemployment insurance, and the like. Fed staffers devote thousands of hours to combing the data for hints about how tight or loose the labor market is or might become. Investors devote millions of hours to divining what Fed Chair Janet Yellen and her colleagues think about these matters.

Meanwhile, another variable that is just as important to the forecast is being almost completely ignored. I refer to labor productivity.

Just as important? Yes, because the Fed wants to forecast the so-called GDP gap—that is, the difference between actual and potential gross domestic product. Potential GDP, in turn, depends on the number of hours of work the economy would have at full employment, which is what all the fuss is about. But it also depends on the future track of output per hour of work (labor productivity). The Fed and the markets could err in forecasting potential GDP either by getting the availability of labor wrong or by getting productivity wrong.

Yet oddly, while enormous amounts of research, energy and chatter are poured into analyzing and forecasting the labor market, hardly anyone is talking about productivity—though that may be the greater source of uncertainty.

Allow me to provide several possible explanations.

First, the percentage of the economy that relatively unproductive sectors, e.g. healthcare and education, has risen. These are both highly compensated labor-intensive sectors and, practically by definition, the growth in productivity in them is slow. Changing that would require the abandoning of artisanal medicine or education and preserving those is the object of the game.

Second, we import too much. Retail is not an area in which we can expect sharp growth in productivity and over the years America has slowly been transforming from a country that makes things to one that sells things. Think you’re buying a car made in America? Think again. Odds are that the engine of the “Made in the U. S. A.” car you’re driving was manufactured in Japan or South Korea.

Third, due to the reliable supply of low-cost unskilled or semi-skilled labor, rather than requiring fewer, more expensive hours but more capital investment jobs are being structured to require more, less-expensive hours at lower capital investment.

It’s the policies, stupid.