NCPA - National Center for Policy Analysis

Workforce Productivity Falls

May 7, 2012

The productivity of U.S. workers fell in the first quarter, suggesting that companies are approaching the limit of how much they can squeeze from the workforce, says the Wall Street Journal.

  • U.S. nonfarm productivity -- defined as output per hour worked -- declined at a 0.5 percent annual rate in the first quarter, the Labor Department said recently.
  • Productivity fell because output rose at a 2.7 percent rate, while hours worked increased at a 3.2 percent pace.

Productivity, which spiked sharply in the early part of the recent economic recovery, is a key part of the economy's ability to raise living standards.  When companies get more output from fewer workers they are able to raise wages and profits without stoking inflation.  The downside is that in the short term higher productivity can mean less need for hiring -- one reason job growth was so light in the early stages of the recovery.

  • Productivity soared from the second half of 2009 through the beginning of 2010.
  • After slashing workers during the recession, companies were able to handle increased demand with the workers they had left, and by investing in new machines and equipment.
  • But those efficiencies have waned considerably as the recovery has picked up steam.

A separate report showed initial claims for unemployment insurance dropped sharply recently, a heartening sign for a job market that had looked increasingly shaky for most of the past month.

  • Initial claims fell 27,000 to 365,000 two weeks ago, a considerable drop from the upwardly revised 392,000 level in the week prior.
  • Of late, the claims data have been disconcerting to economists.
  • After a steady drop from around 400,000 last October to just above 360,000 through March, claims jumped back to just below 400,000 in April.

Many economists have speculated the jump is related to statistical distortions that arise when the Labor Department adjusts the data for the seasons, a theory the new data seem to support.

Source: Conor Dougherty, "Workforce Productivity Falls," Wall Street Journal, May 3, 2012.

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