×

Fill out the brief form below for access to the free report.

  • George W. Bush Institute

    Our Ideas

  • Through our three Impact Centers — Domestic Excellence, Global Leadership, and our Engagement Agenda — we focus on developing leaders, advancing policy, and taking action to solve today’s most pressing challenges.

I'm interested in dates between:
--

Taking Action

Advancing Policy

Developing Leaders

Issues

I have minutes to read today:

Programs & Issues

Taking Action

Advancing Policy

Developing Leaders

Issues

Publication Type
Date
I'm interested in dates between:
--
Reading Time

I have minutes to read today:

Short Run Productivity Measures Tell Us Little

May 10, 2012 5 minute Read by Ike Brannon

Last week’s announcement by the Bureau of Labor Statistics that productivity growth actually fell 0.5% on an annualized basis in the first quarter of 2012 was hailed by not a few publications as good news for workers, since (they reasoned) declining productivity means that companies will need to hire more workers to meet demand rather than have existing workers produce more. No. No, no, no, no, no. God no. That is not even remotely close to how the economy works and any business journalist who files tripe like that should have to take a refresher course. Since the typical journalist doesn’t have the time or the inclination to study more economics, I’ll happily pass on a few things we know about productivity growth. Here’s a sneak peek: It is an unalloyed GOOD thing. Measurement Problems The first thing to remember is that we are not very good at measuring productivity in the short run. The problem is that the way we measure it — dividing total output by the total number of hours worked — requires the BLS to estimate how many hours people work in a given week, which it does by surveying us. And we are no damn good at keeping track of how many hours we work in a given week. Very few of us have a job where we have to clock in and out. While some people may have a vague sense of when they got in and when they left the office, many others simply report that, per their contract, they are at work for 40, or 45, or 50 hours a week. Here’s why that tendency screws up productivity statistics: Let’s say a company experiences a small unexpected decline in demand for its output. In the short run the company does not know if this is a blip or the portent of a larger trend, so it reacts warily. If the company is in a goods-producing industry it may build up inventory, but if it’s in a service industry that option does not exist. Instead, the company will let some workers work less than a full work-week. But the odds are that those workers, if they’re part of the survey, are going to tell the BLS they’re still working their normal 40-hour week — even if they’re spending a greater proportion of those 40 hours playing solitaire or reading Profootballblog.com. This means that when there’s a pause in demand for goods and services, output may fall but the reported hours worked may remain static, leading to a decline in the measured productivity growth. Likewise, companies react to an unexpected increase in demand by boosting hours worked or making people do more during the hours they are at work. Neither of these is fully captured by BLS surveys either, with the result being that output goes up faster than total hours worked and we get a reported increase in productivity growth. But these changes are spurious — that is, they have nothing to do with what we want productivity to capture, which is how fast we are improving the nation’s productive capacity. That figure goes up as our workers become more educated or acquire more skills, as companies invest more in plant, equipment, or technology, or as we figure out how to combine labor and capital in new and different ways to produce more with the same amount of inputs. In the long run productivity trends do (incompletely) capture this — but the fluctuations from quarter-to-quarter merely pick up perturbations in the business cycle. Thus, the decline in productivity in the first quarter of 2012 merely reflects a reduction in demand that also led to a slowdown in GDP growth. It does NOT mean that U.S. businesses have somehow become less productive or that this will somehow create more jobs for U.S. workers.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

Full Bio

Related Articles: