June 06, 2015
In his Upshot piece discussing the May jobs report, Neil Irwin noted both the healthy job growth and the implication for productivity growth. I was troubled by the same issue when I wrote up the jobs report yesterday.
The point here is quite simple, we are seeing relatively rapid job growth, just under 2.0 percent over the last year, when the rate of economic growth is quite weak. The drop in first quarter GDP was clearly an anomaly. (One of the great pointless economic debates of all time is whether the bad number is due to unusually bad weather or an inadequate seasonal adjustment.) But even pulling this out, we are looking at an economy that at best is only growing at a bit more than 2.0 percent annually.
The implication, as arithmetic fans everywhere are quick to point out, is that productivity growth is far under 1.0 percent and possibly close to zero. This seems really hard to believe. You don’t have to ascribe to the robots will take all our jobs view to believe that the trend rate of productivity has to be at least 1.5 percent and quite possibly over 2.0 percent.
Productivity had grown at almost a 3.0 percent annual rate from 1995 to 2005. While that may have been a one-time spurt, even in the years of the slowdown, from 1973 to 1995, productivity still grew at a 1.5 percent annual rate.
There is always a substantial cyclical element to productivity growth. Firms are less concerned about maximizing output per worker when workers are cheap and plentiful. There also is some skewing as desperate workers take jobs in low pay and low productivity sectors like restaurants. By my calculation, this skewing knocked about 0.2 percentage points off of annual productivity growth since 2007. That is some of the story, but clearly there is much else going on.
Anyhow, it is good to see people getting jobs, but we should want to see a better pace of productivity growth. It is also important to remember that we still have a long way to go on the jobs front. While a 5.5 percent unemployment rate may not sound too bad, the employment rate for prime age workers (ages 25-54) is still down by 3.0 percentage points from its pre-recession level and 4.0 percentage points from its 2000 level. It is not plausible that all of these people just decided that they don’t feel like working.
This means that we still have far to go before we have fully recovered from the downturn. The Fed should keep this in mind when it considers putting its foot on the brakes by raising interest rates.
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