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Focus on Economic Data: Productivity - August 9, 2005

Key Economic Concepts:

• Economic Growth
• Nominal Gross Domestic Product (GDP)
• Per Capita Gross Domestic Product (GDP)
• Production
• Productivity
• Real Gross Domestic Product (GDP)

Description:

The preliminary second quarter productivity growth rate 2.2%, was released on August 9. This is a slower rate of growth in productivity than the first quarter revised productivity growth rate. The next productivity lesson will be online September 7 and will discuss the revised productivity growth rate for the second quarter.

The preliminary second quarter productivity growth rate 2.2%, was released on August 9. This is a slower rate of growth in productivity than the first quarter revised productivity growth rate.

The next productivity case study will be online September 7 and will discuss the revised productivity growth rate for the second quarter.

Announcement

The U.S. Department of Labor reported revised productivity data - as measured by output per hour of all persons - for the final quarter of 2004 and for the entire year. The seasonally-adjusted annual rate of productivity growth in the fourth quarter was 2.1 percent. The rate of productivity growth for the entire year was 4.0 percent. The productivity number referred to is that of the nonfarm business sector, the most commonly used gauge of productivity.

The original press release is available at:
http://www.bls.gov/news.release/history/prod2_03032005.txt ^[1]

Note to Teachers

The material in this case study in italics is not included in the student version.

You may wish to use the following larger versions of the graphs and tables from this lesson for overhead projection or handouts in class:

• PowerPoint (429KB)
• PDF (43 KB)

Have students click here for an online interactive activity.

Importance of Productivity Changes for Economic Growth

Our capacity to produce goods and services is determined by how much labor we have, how many hours workers work, the workers' skills and intensity of work, the amount of capital workers have with which to work, and technology. Over time, real GDP in the U.S. has increased due to changes in all of these. We have a larger population with a larger percentage working. In the last ten years, the average worker has been working longer hours. The workers have significantly larger amounts of capital and new ways of producing and organizing production have been put in place.

Productivity, the output of goods and services per hour worked, captures the effects of the increased capital, the increased experience and education of workers, and the new technology. Productivity increases are what allows us to enjoy higher standards of living.

Definition of Productivity

It is a challenge to understand all of the different productivity measures. Changes in productivity are calculated for the business sector, the nonfarm business sector, manufacturing (including calculations for durable goods and nondurable goods manufacturing), and even nonfinancial corporations.

The broadest measure is productivity in the business sector, which comprises 78 percent of GDP. The business sector excludes government and nonprofit organizations, employees in private households, and the rental value of owner-occupied housing. The nonfarm business sector excludes all of those activities plus farming and accounts for about 77 percent of GDP.

Productivity in the nonfarm business sector is the most commonly used measure in studies of productivity. The reason agriculture is removed is because output and therefore productivity are significantly influenced by weather changes.

Nonfinancial corporate output measures productivity for the nonfarm business sector and then excludes banks, securities brokers, insurance carriers, and unincorporated businesses. Nonfinancial corporate output accounts for 54 percent of the value of GDP.

Manufacturing includes durable goods such as machinery, computer equipment, electronics, appliances, automobiles and trucks, lumber, furniture, and stone, glass, and cement products. Manufacturing of nondurable goods includes food, apparel, paper products, publishing, chemicals, and petroleum products. The manufacturing data are actually calculated from different sources than the overall statistics and changes and even directions can differ from the other data.

Data Trends

In the fourth quarter of 2004, productivity increased by 2.1 percent in the nonfarm business sector. Output increased by 3.7 percent. The difference is made up through a combination of the number of individuals employed and how much each individual worked. Total hours worked increased by 1.6 percent. Employment did increase and unemployment fell over that period. Real GDP continued to grow. (See the latest Unemployment case and GDP cases for a description of recent changes.)

In the second quarter, output in the nonfarm business sector increased (4.4 %) while hours of employees decreased (2.3%). Increases in output alone will increase productivity. Thus, the change in productivity was 4.4% - (-2.3)% = 6.7%. (Some discrepancy from the actual 6.8% due to rounding)

For 2004 as a whole, nonfarm productivity grew 4.0 percent and hours worked increased by 1.2 percent. Total output increased by 5.3 percent. (The two do not add perfectly due to rounding error.)

Manufacturing continued a long-run trend during the year. Manufacturing productivity grew at an annual rate of 5.2 percent. However, output only grew at a 4.8 percent rate. The meaning? Fewer hours of work were needed and the number of hours declined by .4 percent. Manufacturing output has continued to grow but productivity changes have meant that we need fewer workers to produce the additional output. That is good news in terms of output per worker and therefore wages per worker, but it is not good for employment within manufacturing.

Hourly compensation rose at an annual rate of 4.4 percent during the fourth quarter. Given the increase in productivity, unit labor costs, that is the labor cost per unit of output, increased by only .4 percent. That result reflects the lack of serious inflationary pressure from rapidly rising wages.

A real dilemma in the U.S. economy has that while increases in productivity are ultimately what allows to increase standards of living, the short term effect is that with increases in productivity that are larger than the increases in spending and production, less labor is needed. That is why the term “jobless recovery” has often been seen in the business press in reference to the failure of employment to increase dramatically as the economy has recovered from the recession in 2001.

Productivity in recessions

Productivity growth most often slows or disappears in recessions and indeed the growth in productivity throughout 2001 (2.5%) was slower than in the late 1990s.

Productivity often increases as an economy comes out of a recession. Businesses begin to expand output by looking for means of increasing production without increasing labor just in case the recovery does not continue. Productivity growth did increase in 2002 to a 4.3% rate of growth.

Historical Data Trends

From 1950 to 1973, productivity grew at an average annual rate of 2.8 percent. But from 1973 to 1995, growth in productivity slowed to an increase at an annual rate of 1.4 percent. From 1996 to 2000, productivity increased at an annual rate of 2.5 percent, almost equal to the 1950 to 1973 rate. The increase in productivity since 2001 is to be expected following the recovery from a recession, but is also evidence on the continuation of relatively rapid growth in productivity.

The slowdown, beginning in the 1970s, and the increases in the late 1990s are not fully understood. The analysis of the Council of Economic Advisers is that about .47 percent of the recent increases can be explained by the effects of more computers and software being used in many businesses. Dramatic changes in the production of computers themselves helps explain about another .23 percent. The quality of labor (increased education and more experienced workers) explains about .05 percent.

The rest is not understood. It may be due to cyclical pressures (that is, fewer workers were being added to employment rolls, but those who were working were producing more) and perhaps to the effects of lower business costs as a result of business use of the internet.

For the future, education and experience will not likely continue to make significant advances. The computer contribution to increases in productivity will probably drop. Many are forecasting a declining growth rate in productivity and therefore in real GDP growth rates.

Have students click here for an online interactive activity.

How The Data Are Calculated

Our capacity to produce goods and services is determined by how much labor we have, how many hours workers work, the workers' skills and intensity of work, the amount of capital workers have with which to work, and changes in technology. Over time, real GDP in the U.S. has increased for all these reasons. We have a larger population with a larger percentage working. In the last ten years, the average worker has been working longer hours. The workers have significantly larger amounts of capital and new ways of producing and organizing production have been put into place.

The productivity measures capture the effects of the increased capital, the increased experience and education of workers, and the new technology. If productivity increases faster than population growth, real GDP per person can increase and we can all enjoy higher standards of living.

Have students click here for an online interactive activity.

Questions

Which of the following will likely cause GDP, real GDP, and productivity to increase?

1. An increase in the number of machines and factories?
   (Choose each one that is correct.)

   GDP ______; real GDP _____; productivity _____

2. An increase in the number of workers employed?

   GDP ______; real GDP _____; productivity _____

3. An increase in the average price level?

   GDP ______; real GDP _____; productivity _____

4. An increase in the skills of the labor force?

   GDP ______; real GDP _____; productivity _____

5. The creation of new technology that allows each worker to produce more?

   GDP ______; real GDP _____; productivity _____

6. An increase in the number of hours worked by current workers?

   GDP ______; real GDP _____; productivity _____

7. Increased spending on research and development?

   GDP ______; real GDP _____; productivity _____

[Answers

1. GDP yes ; real GDP yes ; productivity yes .
2. GDP yes ; real GDP yes ; productivity no .
3. GDP yes ; real GDP no ; productivity no .
4. GDP yes ; real GDP yes ; productivity yes .
5. GDP yes ; real GDP yes ; productivity yes .
6. GDP yes ; real GDP yes ; productivity no .
7. GDP yes ; real GDP yes ; productivity yes ]

Links Used:

1. ^{^} "Productivity and Costs Press Release" - (www.bls.gov) This is a BLS article that provides information on U.S. productivity and costs from the fourth quarter of 2004.

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