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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.
How Trade Spreads Holiday Cheer
It is projected that the average American household will spend more than $1,000 during the holidays this year.
Deporting Salvadorans May Lead to Economic Decline
We should think carefully about a policy whose major impacts are likely to be reductions in employment and economic activity here at home, and increased instability and lawlessness along our borders.
Bush Institute's Laura Collins Talks Immigration on Good Morning Texas
Last week, Deputy Director of Economic Growth at the George. W. Bush Institute Laura Collins spoke with Good Morning Texas about immigration myths. During the interview, Collins had the opportunity to set the record straight and address common misconceptions about legal immigrants living in America today. The segment was inspired from facts released earlier this fall by the Bush Institute in the third edition of America's Advantage: A Handbook on Immigration and Economic Growth. Watch the full Good Morning Texas interview here.