Sorting Out the Third Quarter Productivity Data

By at 4 November, 2021, 11:22 am

by Raymond J. Keating –

Labor productivity matters to the economy more than is generally acknowledged. After all, nonfarm business sector labor productivity, or output per hour, is essential over the long run to determining income. That is, wages and salaries are dependent on productivity. For good measure, productivity also matters to the profitability of businesses.

At the same time, there are times when productivity data need to be set aside due to underlying circumstances. That’s the case with the new report on productivity from the U.S. Bureau of Labor Statistics.

The BLS estimated that in the third quarter of this year, productivity plunged by 5.0 percent. Under normal circumstances, that would be alarming.

Source: Federal Reserve Bank of St. Louis, FRED

However, during and around periods of recession, productivity data get thrown out of kilter. Given that labor productivity is calculated, as noted by the BLS, “by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers,” dramatic changes in hours worked can skew matters.

For example, when output took a dive in the second quarter of 2020, but hours worked dropped by an even greater amount, productivity actually spiked up. And now in the third quarter 2021, output increased by a relatively small amount while hours worked jumped higher, and hence, productivity actually plunged.

So, yes, productivity matters a great deal, but productivity data must be placed in proper perspective during anomalous economic times.

In the end, when clear of the effects of deep troubles brought on by a pandemic, for example, what we want to see is both output and employment growing, but with output running at a faster pace. That scenario, by the way, is dependent upon entrepreneurship and investment driving innovation and efficiency forward.

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


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