Thursday, May 6, 2010

This Recession is Un-'Real'

One way in which the recent recession - particularly the later part of it - has been unusual is that productivity growth has been very strong, as can be seen in the BLS index of output per hour worked:That is in contrast to the usual pro-cyclical pattern, where productivity suffers during recessions: The historical association between productivity and employment declines lends at least superficial plausibility to the "real business cycle" (RBC) story wherein fluctuations result from optimizing agents choosing to work less (and enjoy more leisure) during periods where their marginal products are relatively low. While many find the RBC story dubious for other reasons (see, e.g., Larry Summers), the behavior of labor and productivity over last couple of years would appear to directly contradict it.

The rapid productivity growth has also caused a violation of the "Okun's Law" rule of thumb relating output growth to unemployment, as we have had an even larger increase in unemployment than the path of output would normally imply. This was examined in a recent San Francisco Fed Letter by Mary Daly and Bart Hobijn, which included this figure: Today's BLS numbers suggest the productivity boomlet is tapering off. The AP's Martin Crutsinger writes:
U.S. companies are running out of ways to increase productivity from leaner workforces, a sign that they may need to step up hiring in the months ahead.

That was the takeaway from reports released Thursday by the Labor Department.

Productivity grew at an annual rate of 3.6 percent in the first quarter, better than economists had expected. But it still declined sharply from growth that exceeded 6 percent for each of the previous three quarters....

Now, economists think companies are nearing the limits of how much they can expand output without hiring more workers.

"Companies addressed the post-Lehman collapse in the economy with a massive wave of layoffs. With demand now picking up ... they need to hire again," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Normally, I wouldn't be rooting against productivity growth since it is, after all, why the US and much of the world has become rich, but, under the circumstances, I hope he's right.

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