Squeaking Pips

8 December 2004


US Worker Productivity Increases More Slowly

Productivity is a virtue in life. In economics, it is more of a mixed blessing. Productivity to the disciples of the dismal science understand the term to mean output per worker. When productivity rises, more is getting done with the same (or fewer) number of workers. Simple enough, but it does mean that slower productivity growth in the current environment is a good thing. It means more jobs. It is also bad; it means higher costs to business.

Last week’s non-farm payrolls disappointed. New jobs in the last month numbered 112,000, far below expectations and not enough to keep pace with growth in the workforce. Unemployment is at 5.4% and is a misleading figure because after a while, people simply aren’t counted. Couple this with a fragile economy kept afloat only by consumer spending, and one quickly sees a need for improvement in employment. So, lower productivity growth means that business will have to take on new staff. More jobs will keep the consumer in the malls and keep the economy moving forward.

The business sector has benefited for many years from improved productivity. Much of this stems from technological innovation, but computerization of many fields has just about run its course. What one sees in productivity improvement now is marginal in nature rather than quantum. The consensus is that there is more output available with current capacity only if more hands are there to utilize it. Business leaders, however, remain reluctant to hire as the costs will depress their margins – never mind that top-line growth is there for the taking.

Fed policy clearly favors rising interest rates to keep a lid on inflation, and this is where Mr. Greenspan is off target. Inflation derived from commodity price increases represents shifts in rents among capital owners, and there is little the Fed can do to affect it. Consider the oil shocks of the 1970s – no interest rate policy in the world could have affected the lack of supply in the short-to-medium term and only marginally in the long-term. Wage-pull inflation is quite different, but there is no evidence of that, yet. But the Fed chooses to ignore the distinction.

The stage is set for an economic slow-down again. Workers will slow spending if they don’t feel more secure, and businesses can’t grow if they don’t take on now workers because productivity gains have just about topped out. But if the Fed keeps raising rates, business won’t do the hiring needed. Better to risk a little inflation and keep things on track for 3.7-4.0% GDP growth than cut off growth all together simply because oil is needlessly at $43 a barrel. If the FOMC on December 14 were to hold rates stable, Wall Street might be all adither (since another hike is almost completely priced into stocks and bonds), but it would be a good move for the economy.

© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

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