The Curse and the Blessing of High Productivity

Is the announcement that U.S. productivity growth hit a record 8.5% good news or bad? Just ask Europe.

May 13, 2002

Is the announcement that U.S. productivity growth hit a record 8.5% good news or bad? Just ask Europe.

Productivity is simply the amount of economic output each worker produces per hour. Higher productivity is a good thing in the long run. In fact, it is the only way that a nation’s overall standard of living can rise. But in the short run, high economic productivity numbers might not be so beneficial.

In fact, one of the disturbing trends in recent U.S. economic statistics is that production has been growing — but so has unemployment.

The 6% jobless rate registered in April 2002, takes the U.S. economy right back to where it was at the tail end of the so-called “jobless recovery” in 1994.

Worse yet, unemployment rates seem to be growing. It’s a trend that has some U.S. economic analysts looking for the dreaded “double-dip” recession.

Seen in this light, the new U.S. productivity numbers are not good news. Productivity, after all, is calculated by dividing the amount produced by the number of workers who produce it.

So it can rise either because production is up — or because employment is down. In fact, the spectacular 8.5% rise in productivity is the simple numerical result of more being produced and sold — with fewer workers.

Why does this matter? Just ask the major European countries. Despite their unimpressive economic performance, they have experienced very good productivity growth over the past ten years.

But the primary reason for that was because European companies kept employment growth down — and not because production was growing fast. Europe’s high productivity growth was just the flip side of Europe’s employment stagnation.

Could the United States be headed for similar problems? At first glance, that seems unlikely. The labor market barriers that have caused Europe’s problems simply do not exist in the United States. And yet, there is reason to be concerned about the downside of the U.S. productivity growth.

The United States had an incredibly mild recession because consumers kept spending. Of course, consumers can only keep spending if their incomes go up.

A key problem here is that consumers are also workers. That means that high unemployment translates into less income for consumers.

Under those circumstances, continued high productivity growth would be accompanied by a collapse in consumer demand — and that dreaded double-dip recession.

U.S. production is expected to grow by some moderate amount — like 3% — in the second quarter of this year. With any luck, employment will also start to grow. That will result in bad short-term productivity numbers. But it will also be a sign that the U.S. recovery is for real — and not a mirage.