Worker Productivity Is Plummeting, But What Does it Mean?

Another jobs report has come and gone with nary a peep about it in the media. The reports, which used to dominate the first news cycle of every month during the recession and early stages of the recovery, have become non-events for both conservative and liberal pundits alike. Simply put, they are not good enough to be used as tools to praise Obama nor bad enough to be used as indictments of his economic stewardship. For the most part (absent situations like last month’s disaster) they are just, well, blah.

Take this month for example. Job creation rebounded from last month’s horrible numbers as the economy added 223,000 jobs. The unemployment rate (5.4 percent) and the number of unemployment persons (8.5 million) went essentially unchanged.

Overall it’s hard to shake the feeling that we’re in a rut. Over the past three months the economy has added an average of 191,000 jobs per month, compared with 260,000 for the same period in 2014. Economic growth in the first quarter came in at an extraordinarily weak 0.2 percent annual rate – a figure that no economist would ever use to describe a recovery.

But perhaps the biggest hit, especially to everyday Americans, is that average hourly earnings ticked up by a meager 0.1 percent this month, which means that earnings have only risen by 2.2 percent over the past year. The question is why? Why, given the moderate job growth of the last several years, have wages not ticked upwards? After all, the smaller the unemployment number the harder it is to find qualified workers and thus the more employers should have to pay to attract them, or at least one would think.

In some parts of the economy that competition does seem to be putting upward pressure on wages. Earlier this year McDonalds announced a pay increase that would bring average wages to more than $10 per hour. Walmart, Target, T.J. Maxx and other food services and big-box retailers have made similar announcements. Although the raises coincided with a national push to increase the minimum wage, you can bet the companies didn’t do it out of the goodness of their hearts; after all, these are not charitable institutions. Instead, as John Cannally, vice president of LPL Financial, explains, this is more likely the result of not being able to find people willing to work.

“What the Fed’s told us is that companies are having trouble attracting and retaining and paying skilled labor,” Cannally told US News. What that sign told me was maybe they’re having trouble getting teenagers out of their homes and into the store to work for minimum wage.”

Unfortunately, those gains aren’t being seen elsewhere. Part of the problem, as Jeffrey Sparshott writes for the Wall Street Journal, is that workers’ simply aren’t as producing as much as they use to.

The productivity of nonfarm workers, measured as the output of goods and services per hour worked, decreased at a 1.9% seasonally adjusted annual rate in the first quarter from the previous period, the Labor Department said Wednesday.

That marked the second consecutive quarter productivity has declined, something that has happened only three times in the past quarter century. The latest dip punctuates a series of sub-par readings since 2010.

The problem is that wages and productivity are positively correlated. If workers are more productive, paychecks go up. But workers aren’t producing more in an hour so their hourly wages aren’t going up, which ripples through the economy in depressed consumer spending.

This may not be such a negative indicator if there was a rash of recent hiring. New workers aren’t as productive as long-term employees simply because they are still being trained. But hiring has been tepid recently, suggesting that there may be a deeper problem than workers simply trying to figure out their new jobs. Instead, what could be happening is that employers are remaining skittish about the global economy, which is encouraging them to hire more workers—which can be laid off if demand falls—rather than investing in productivity-boosting equipment, factories and software.

If that’s the case then the government should really hone its focus to passing pro-growth policies, especially ones that reduce the disincentive for employers to make investments in their businesses.