Announcement

The Bureau of Labor Statistics of the U.S. Department of Labor today reported revised productivity data--as measured by output per hour of all persons--for the second quarter of 2003. The seasonally-adjusted annual rate of productivity growth in the second quarter was 6.8 percent, compared to a 2.1 annual percent rate of increase percent in the first quarter of 2003. 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:
[EEL-link id='1285' title='www.bls.gov/news.release/archives/prod2_09042003.pdf' ]

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 changes in technology. Over time, real GDP in the U.S. has increased for all of 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 in place.

The productivity measures capture 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

Productivity is the output of goods and services per hour worked.

Data Trends

Figure 1: Changes in Nonfarm Business Productivity (Percent Change in Output per Hour) Quarterly Changes 1998-2002

The latest productivity data indicate that businesses are continuing to react to the slowdown in growth in total output during the recession and the lack of significant increases since. Employment decreased during 2001 and 2002 and businesses reduced the hours worked by each employee as well. In the latest quarter businesses have decreased the hours worked by their employees (-2.3%). (See the latest Unemployment case case for a description of recent changes in employment.)

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)

The increase in productivity for 2001 (1.9 percent) was less than increases in 2000 (annual average of 3.3 percent), 1998 (2.6 percent) and 1999 (2.3 percent). This is the lowest rate of productivity growth since 1995, but still higher than the average rate of change in productivity over the previous twenty years. The longer run trend in productivity over the past decade has allowed real GDP per capita to increase. It also means that wages for workers can increase and can do so without excessive upward pressures on prices. Overall productivity increased during 2002 at a rate of 5.4 percent, the highest annual rate since 1950.

Hourly compensation rose at an annual rate of 3.8 percent during the quarter. Unit labor costs are the costs of labor per unit of output. Thus the change in unit labor costs is the percentage change in hourly compensation minus the percentage change in productivity. Or 3.8% minus 6.8% = -3.0%. (Unit labor costs actually fell by 2.8%; the difference is due to rounding.) The decrease in unit labor costs provides evidence that inflationary pressures are not a current concern.

The real dilemma in the current economy is 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” is often seen now in the business press.

Historical Data Trends

Figure 2: Changes in Nonfarm Business Productivity (Percent Change in Output Per Hour) Annual Changes 1970-2001

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 1050 to 1973 rate.

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. A consensus forecast is for a declining growth rate in productivity and therefore in real GDP growth rates.

  1950 -73 1973 - 95 1995 - 00 Future
Growth in hours worked 1.6% 1.7% 1.7% 1.2%
Productivity 2.8% 1.4% 2.5% 2.0%
Real GDP 4.2% 3.0% 4.0% 3.0%

(The numbers do not add in all cases due to rounding and the inclusion of slightly different measures in the productivity and hours calculations. However, increases in the growth in hours worked and increases in productivity will cause similar increases in the growth rates of real GDP.)

How The Data Are Calculated

Productivity data represent the amount of goods and services (in real terms) produced per hour of labor. They do not identify the separate contributions of labor, capital, and technology. Changes in productivity include the effects of all (except hours of work) possible influences on output – technology, ability, skills, and effort of labor, capacity utilization, managerial skills, and the amount of capital.

Other periodic announcements report multifactor productivity indexes, which do measure the separate effects of hours of labor, education levels and experience of labor, amount of capital, and the effects of changes in technology.

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 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.