Slow Productivity Growth a Blessing -- For Now

Practical Economics

Slow Productivity Growth a Blessing -- For Now

Tepid productivity growth is helping to spur more hiring now, but if the sluggishness continues indefinitely -- as some economists are predicting -- it could impede a rise in wages and living standards.

Praise today's sluggish productivity growth. Economists usually wring their hands when productivity grows slowly. Over time, sluggish productivity growth means that rising wages are more likely to exacerbate inflation, U.S. firms won't be as competitive in the global marketplace, and living standards here will rise more slowly -- not very good for long-term well-being.

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For now, however, the tepid increase in productivity -- broadly defined as output per hour of work -- is proving to be a benefit, helping to spur more hiring. Job growth is a must to bolster consumer and business confidence, boost demand further and prompt companies to continue expanding.

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With productivity growing so slowly, companies can't put off new hiring as they might have done in headier times. Today's downsized workforce has been stretched to its limits, and employers no longer have leeway to increase production without taking on more workers. Now, with demand picking up, they need to hire.


The current pattern defies historical trends. Usually productivity falls off as the economy begins to slow, and it rebounds sharply during the early stages of an economic recovery. This time it's different. Productivity grew a mere 0.6% in 2008 and surged by 4% in 2010. But it froze in 2011, growing by a scant 0.4%.

There are several good reasons for the disparity. When the Great Recession hit in late 2007 and early 2008, panicked companies shed workers far more quickly than in previous slumps. The post-2009 recovery has been anemic -- and spotty -- with several false starts. Today, many firms can't find workers with the skills they need.

Also a factor is that this time the recession stemmed from a global financial collapse, not just the traditional business cycle ups and downs. Such major market meltdowns typically have had a long-lasting impact, inhibiting productivity growth for years after the financial system is repaired. This one is no exception.

Signs are that productivity growth will remain sluggish through 2014 or longer. Although figures for the January-March period are expected to show a decline, such quarterly numbers are volatile. The rise for all of 2012 seems likely to be a little above 1%, and expectations are that the trend will continue through 2014 or 2015.


Moreover, some economists argue that recent productivity figures may overstate growth. The government's calculations for output, on which the productivity statistics are based, include U.S. production that has been outsourced abroad -- a technique that, though statistically valid, exaggerates the nation's output.

And much of the surge in productivity growth that the U.S. enjoyed during the late 1990s and early 2000s stemmed from breakthroughs in computer-related technology. By contrast, much of the recent innovation in this field, such as the iPhone, has primarily benefited consumers -- and isn't as likely to increase worker efficiency.

For now, economists and business executives are more interested in creating more jobs than in spurring productivity growth. And it may be years before weak productivity growth makes America less competitive. After all, Europe is in a slump, and some emerging market economies are slowing.

But weak productivity growth won't be welcome if it continues after the job market rebounds. In the medium term, wages will be less likely to climb. Longer term, any wage increases will feed inflation, U.S. firms will eventually become less competitive, and living standards will rise more slowly. It's a worrisome trend that bears watching.