NCPA - National Center for Policy Analysis

New Economy Productivity

August 11, 2003

A review of recent recessions shows that there has been a change in the behavior of productivity. Historically, a sharp drop in productivity preceded recessions, as employers kept workers on even as output fell.

Productivity rose after the recession mainly because employers were reluctant to hire as output increased, says Bruce Bartlett:

  • Thus, in the 6 quarters preceding the trough of the 1973-75 recession there was zero increase in productivity during that whole period.
  • In the 6 quarters before the 1981-82 recession, the total increase in productivity was just 0.8 percent.
  • In the 6 quarters after the trough, productivity rose by 5.9 percent in both cases.
  • Productivity rose by 1.2 percent going into the recession and 4.5 percent coming out.
  • The higher productivity going in meant that fewer workers were needed coming out of the recession.

Now, in the current recession, which ended in the 4th quarter of 2001, we have seen even higher productivity on either side. The latest data show an increase in productivity of 4 percent in the 6 quarters before and 6.5 percent in the 6 quarters after. That is why employment growth and hiring levels remain weak. Employers are raising output without adding much new labor, explains Bartlett.

It is important to remember that this is a short-run phenomenon. In the long-run, higher productivity increases employment, a fact documented in 2 new studies from the Federal Reserve Bank of Richmond and the Federal Reserve Bank of San Francisco. But in the meantime, employment growth may still be slow for a couple more months. (See the figure.)

Source: Bruce Bartlett, "New Economy Productivity," National Center for Policy Analysis, August 11, 2003.


Browse more articles on Economic Issues