The productively disinflationary American worker

August 9, 2012

Strong productivity may be good for an economy’s long-term growth prospects. But it’s not always great for workers in the near-run, since it literally means firms are squeezing more out of each employee. In reality, rapid productivity growth can make it harder for workers to get new jobs or bargain for raises.

The benefits of operating efficiently are obvious enough: Productive firms will have more money left over to invest, which should lead to more job creation in the future. Except lately, that future seems never to come, giving rise to the somewhat oxymoronic notion of a jobless recovery.

Millan Mulraine at TD Securities explains:

In many ways, the 2009 and 2002 economic rebounds are very similar in that both can be characterized as largely ‘jobless recoveries’. However, the compensating boost from capital investment – which was a defining feature of the 2003 economic recovery and a key underpinning for economic and productivity growth during the 2003-2007 period – has been largely missing during this cycle. The missing boost from capital investment activity has reinforced the subpar economic performance over the past two years, and will portend poorly for longer-term economic growth potential if the trend continues.

Productivity was very strong at the start of the recovery, but then lost steam as the rebound went on.

FRED Graph

Data on Wednesday showed productivity growth picking up again in the second quarter, posting a 1.6 percent increase that was more than double the first quarter’s pace.

As discussed in this post, how the benefits of productivity are distributed can matter as much for overall well-being as how quickly the measure of output per hour worked rises. Unit labor costs or total worker compensation climbed 1.7 percent, much more than expected. But analysts said the trend did not signal an end to the long-running pattern of stagnant median U.S. wages.

John Sullivan at High Frequency Economics says much of the second quarter rise came from one-time payouts, not broad-based salary increases.

The surge appears to have reflected discretionary bonus income rather than more inflationary wage rates or other costs. And while the Q2 pace was above consensus, it was roughly in line with the trend in goods and services inflation.

For economists at Goldman Sachs, this reinforces a subdued inflation trend that gives the Federal Reserve room to ease monetary policy further if it wants.

On net, the year-over-year trend in unit labor costs remains weak at 0.8%, consistent with sluggish core inflation.

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