Friday, November 9, 2012

Trends in Productivity the Obama Administration Should Consider

Productivity, defined as a measure of the amount of output per hour of work, is shown to be typically pro-cyclical. This means that productivity increases during economic upswings and slows down (or even declines) when the economy is in a downturn.  Several causes have been forwarded to sustain this. One declares that labor and capital inputs are worked harder during boom times than in busts.  Another observation pronounces that the reallocation of resources to more productive activities is faster when the economy grows rapidly than when it slows down.
Pro-cyclical exceptions

In 2009, productivity growth was expected to slow down further in many countries. However, there appeared to be some exceptions to the pro-cyclicality of labor productivity. The experiences of the United States and Europe are two examples reflecting this economic wrinkle. Compared side by side, striking differences are evident between these two regions in terms of the productivity growth rates with which they entered the current recession.  For the long period of 2000-2008, labor productivity in the United States increased at 2% against 1.5% in the European Union. (The 1.1% figure is even much smaller in the original EU-15 member states that exclude the new member states from Central and Eastern Europe.)

These differences reflect a more efficient use of capital, labor, and other sources of growth in the United States. The most recent productivity advances of the U.S. have been realized, however, through rapid layoffs. This further suggests that the productivity of the remaining workers and firms is actually strengthening.

Traditional productivity growth rates 

During the run-up of 2008, the Euro Area showed a surprisingly weak productivity growth (below 1%). This was attributed to the large increases in employment coming from a relatively large labor reserve pool.  In the same quarter, output and productivity growth rates in the Euro Area turned negative following the traditional pattern that employment growth does not adjust as quickly to a deteriorating economy in Europe as it does in the U.S.  Presently, productivity growth rates in advanced economies are falling below historical structural productivity trends. These represent the rate where productivity can grow.

To get back to the structural growth trend, an increased productivity through investment in new capital and innovation is needed - and not just through cost-cutting of the current resource base.  This would comprise investments in technological change and innovation, skill and performance level of the labor force, and all the organizational intangibles (management and workplace practices, organizational structure, and human resource strategies).

Given the current constrained economic climate, all these are big challenges. Added to this is the expectation that high productivity growth rates also imply greater efficiency of resources once the economic environment improves.  Productivity growth will also translate into high levels of output per hour. These higher productivity levels will also reflect the presence of a strong resource base in terms of human and physical capital per worker.  When maintained during the downturn, they will provide the firms with the means to more easily innovate themselves out of the recession resulting in a better resurgent productivity growth.

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