The Real Story on Labor Productivity

By SBE Council at 5 November, 2020, 1:08 pm

by Raymond J. Keating-

Labor productivity – that is, output per hour – is important because ultimately labor compensation is tied to labor productivity. For good measure, the more productive that workers are, the more profitable, generally, businesses will be. So, increases in labor productivity are win-wins that make clear that workers and business owners are not at odds with each other, but instead, work together and benefit accordingly.

Having said that, no one should get excited about the jumps in labor productivity experienced in the second and third quarters of 2020, as reported by the U.S. Bureau of Labor Statistics. Indeed, during down economies, productivity data gets funky.

Nonfarm labor productivity increased by 4.9 percent in the third quarter, and that came after a jump of 10.6 percent in the second quarter.

Source: Federal Reserve Bank of St. Louis, FRED

But there was nothing positive to find in these increases. They were about massive declines in output and hours worked in the second quarter, and a small recovery in each in the third quarter. (See the following two charts.)

Source: Federal Reserve Bank of St. Louis, FRED

Source: Federal Reserve Bank of St. Louis, FRED

The BLS reported it this way:

“The 10.6 percent gain in nonfarm business labor productivity in second-quarter 2020 reflected a decline in output of 36.8 percent and a decline in hours worked of 42.9 percent; these were the largest declines in both series which begin in the first quarter of 1947. In contrast, the 4.9-percent increase in productivity in third-quarter 2020 reflected the largest gains in the output and hours series, with output increasing 43.5 percent and hours increasing 36.8 percent. Although gains were historically large, the third-quarter 2020 output and hours worked index levels remain below their fourth quarter of 2019 levels, the last quarter before the coronavirus (COVID-19) pandemic began. Specifically, output remains 4.0 percent below its fourth-quarter 2019 level, recovering somewhat faster than hours worked, which remains 7.5 percent lower.”

So, the snap back in productivity in the third quarter, while welcome, was a partial phenomenon, and we have a long way to go to get back to where the economy should be in terms of output and hours worked.

Looking ahead, when breaking free from the distortions generated by the pandemic and the related shutdowns, we need to lay the groundwork for real gains in labor productivity, and worker compensation and business profitability, by providing a sound foundation for entrepreneurship and private investment to flourish.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.