- The Washington Times - Sunday, August 24, 2003

Productivity is the amount of goods and services produced per worker hour, a measure of the efficiency of our economy. Historically, productivity growth has had its ups and downs. In the period after World War II, non-farm business sector productivity has shown three distinct long-term patterns: strong growth averaging nearly 3 percent annually up to the mid-1970s, weak annual growth averaging slightly more than 1 percent from the mid-1970s to the mid-1990s, and strong growth again averaging 3 percent a year from 1996 to date.

In the short run, productivity growth is pro-cyclical, rising during recoveries and falling in recessions. Since the current economic recovery began in November 2001, non-farm business productivity growth has averaged nearly 5 percent a year, an impressive performance. Just how much of the added growth is purely cyclical, and hence temporary, and how much is long-term or structural, is uncertain. But some is very likely structural, and it would not be unreasonable to expect the long-term growth rate to settle down to around 3 percent.

What are the main causes of the strong showing in productivity since the mid-1990s? Improvements in information technology and the computer revolution surely rank high, as well as capital investment generally, more efficient production processes, and a more skilled and educated labor force.

In the short run, productivity growth has its negative side — worker displacement. During the recession from March to November 2001, non-farm payroll employment declined by more than 1.6 million. In the recovery since that time jobs have continued to fall, by 1 million. Besides strong productivity gains, other factors have helped sour the job market, not least the exporting of jobs.

How much economic growth will be needed to create new jobs and reduce unemployment in the year ahead? Economists are forecasting average annual increases in real gross domestic product for the next four quarters of 3.5 to 4 percent, up from the 2 percent range we’ve experienced since the recovery began. Let’s look at how steep the hill is and the hurdles to be jumped.

First, additions to the labor force from normal growth in the working-age population will amount to about 1.8 million. They will want jobs.

Second, news of an improving economy will probably cause the labor force participation rate to rise by attracting back into the labor force some of those persons who previously dropped out or did not enter because of poor job prospects. Since employment has continued to fall throughout the recovery, unlike in previous recoveries, a large backlog of these “hidden” unemployed has built up. Many will compete for jobs with the active unemployed, who are officially counted in the unemployment rate, thus dampening the effect of any new job creation on the jobless rate.

Third, as demand increases employers can be expected to make fuller use of their existing workers by lengthening the workweek before entailing the considerable fixed costs of hiring new workers.

Finally, if productivity continues to grow for another year at its nearly 5 percent rate during the recovery, then counting all the inputs together GDP will have to rise by about 7 percent to make a dent in the unemployment rate. Even if productivity gains slow to a 3 percent rate, the GDP requirement is still high, about 5 percent. If consensus forecasts are right, such economic growth rates do not appear to be in the cards. Therefore, it seems unlikely that jobless rates will decline in the year ahead.

However, it takes less economic growth to create jobs than it does to reduce the number of job-seekers. If productivity growth slows to its trend rate over the next four quarters, GDP gains of 4 percent should be sufficient to reverse the downward trend in employment.

Reaching full employment is harder than staying there. Once a desired jobless rate is attained, say 4 percent, the hill facing the economy is less steep and there are fewer hurdles to leap. Cyclical unemployment, both hidden and active, will have been absorbed into employment, and the workweek will have leveled off. The inputs to GDP then become just population additions to the labor force and productivity. With faster growing productivity, the economy’s long-term potential growth rate is now probably 4 percent or slightly more.

It’s hardly consoling to a productivity-displaced worker to hear about the long-term benefits of greater efficiency. But the consequences of productivity growth are indeed magical, feeding back into the economy, compounding the benefits and raising living standards for everyone. In the labor market, long-term productivity growth is an essential ingredient for a rise in real wages.

Alfred Tella is former Georgetown University research professor of economics.

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