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Home Publications Blogs Beat the Press Productivity, Profits, and Job Growth

Productivity, Profits, and Job Growth

Tuesday, 09 August 2011 14:07

An AP article on the latest productivity data from the Bureau of Labor Statistics (BLS) was a bit confused on the relationship between productivity, profits, and job growth. The article noted the 0.3 percent decline in productivity reported for the second quarter. This followed a decline of 0.6 percent in the first quarter. It suggested that this could be bad for hiring since it would reduce corporate profits and leave them with less money to hire additional workers.

Actually, slower productivity growth can be good for hiring. Increased productivity and hiring are alternative ways for meeting additional demand for labor. If employers find that they can't get more productivity out of the existing workforce, then they have no choice but to hire more labor (which could mean overtime) in order to meet an increase in demand.

Profits on the other hand tend to be very weakly correlated with employment growth. Firms will not hire more workers just because they have higher profits, they hire more workers when they feel they have the demand for additional workers. This is why hiring was very weak in 2010 even though profits had bounced back to their pre-recession level.

It is also worth noting that productivity is poorly measured and the data are subject to large revisions. For example, productivity growth in the first quarter had been previously reported as 1.8 percent. For this reason preliminary productivity data must always be viewed with considerable skepticism.

It is worth noting that the weak productivity growth of the last year appears to be offsetting the rapid growth from earlier in the downturn. This has left the economy slightly below its post-1995 productivity growth path. Several analysts had suggested that there had been a qualitatively leap in productivity growth earlier in the downturn and offered this as an explanation for slow job growth. It now seems that firms were simply quicker to lay off workers than usual, which explains the unusually fast productivity growth early in the downturn.


Productivity Growth, 1995-2011


Source: Bureau of Labor Statistics.

Comments (6)Add Comment
Evidence of Fisher's Debt-Deflation.
written by Donald Pretari, August 09, 2011 4:54
"It now seems that firms were simply quicker to lay off workers than usual, which explains the unusually fast productivity growth early in the downturn."


2:36 pm February 6, 2009
Don the libertarian Democrat wrote:
“More and more businesses are cutting jobs in anticipation of tougher times.”

This is what’s happening. Employers are cutting jobs proactively in anticipation of a deep bottom. It’s a Proactivity Run. It is evident in Fisher’s Debt-Deflation. This also explains why productivity is rising.

Since this run began in the middle of November, these figures mean that we are losing to Debt-Deflation. Since we’ve been trying to avoid this, what we’ve done hasn’t worked. Government needs to take bolder actions, including the Fed."

I think Fisher's Views have been vindicated.
Dazed and confused, no more
written by Nassim Sabba, August 09, 2011 5:16
I read the article from AP and couldn't really put all of together. I felt like I was stupid not to get what they were saying. Thanks for the concise clarification. I am proud of myself for at least being confused by the article/analysis by AP. You saved my day.
Not just AP gets it wrong
written by Robert Oak, August 09, 2011 7:51
We just wrote up an overview, loaded with BLS definitions, corresponding equations and graphs, on The Economic Populist.

In all honesty, beyond the significant revisions, of all of the government reports, this one generates some of the biggest confusion.

First, I really question the downplay on outsourcing so far on it's effects by the BLS, from their own research, but I take it, output up, productivity way up, for workers = bad. Output up, productivity down, for workers = good.

To me the missing piece is globalization. Where did all of the jobs go in 2009? Me thinks straight to China and India.
written by Doc at the Radar Station, August 10, 2011 7:05
Productivity increases in the last decade may have been badly mismeasured. Outsourcing/offshoring are likely the primary reasons for this. Check this out:


http://www.bea.gov/scb/pdf/2011/02 February/0211_napa.pdf
written by skeptonomist, August 10, 2011 9:38
It seems to be a current fad in the media to hang on the latest productivity figures, as if they were a direct measure of how the economy is doing. Maybe they just need to fill space. Over the long run productivity is dependent on capital investment - what businesses spend on new facilities with the latest labor-saving equipment, but in the short term, especially in a recession, it can be dependent on how many employees have been fired. Thus it can show either of two different things, responding on two different time scales. The important things are investment and employment and that is what should be reported. Productivity is the result of dividing two things which tend to move in the same direction.
productivity and market share
written by scott moore, August 15, 2011 1:01
I think they got it right. "The drop in productivity helped push UNIT labor costs up 2.2 percent". That is exactly what happens in the real world, and in a competitive environment, that won't fly. Another way to think about this, is that productively is linked to market share. As productively declines market share drops(global)especially as it relates to manufacturing. As market share declines, employment drops. To complicate the issue (noted by others), it does not make any different how the market pie decreases, if it shrinks (or is anticipated to shrink)that will impact employment. If one adds lower productively to the formula, employment will suffer further.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.