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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.

KEY CONCEPTS

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

Current Key Economic Indicators

as of May 5, 2013

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.

Employment and Unemployment

Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

Federal Reserve

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...

RESOURCES

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:

[Note to teacher: 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:

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.

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 77 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 76 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. Fluctuations in productivity measures in farming therefore may be only temporary.

Nonfinancial corporate output measures productivity for the nonfarm business sector excluding such activities as banks, securities brokers, insurance carriers, and unincorporated businesses. It accounts for 53 percent of the value of GDP. Manufacturing includes about 17 percent of business employment. The manufacturing of durable goods includes machinery, computer equipment, electronics, appliances, automobiles and trucks, lumber, furniture, and stone, glass, and cement products (11 percent of employment). Manufacturing of nondurable goods (6 percent of employment) includes food, apparel, paper products, publishing, chemicals, and petroleum products. The manufacturing data are actually calculated from different sources than the overall statistics and can differ slightly from the other data.

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.

Productivity in recessions

Productivity growth most often slows or disappears in recessions and indeed the growth in productivity throughout 2001 (1.9%) was significantly slower than in 2000 (3.3%).

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 5.4% rate of growth.

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.

An Activity

Ask your students to interview a local business owner. Ask the business owner what has happened to sales per employee in the last year. Try to determine why. An increase in hours worked, falling sales and constant number of employees, new technology, etc.? Bring the answers back to class. Calculate an average change and discuss the reasons.