Productivity, and unit labor costs, rise

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Non-farm business productivity rose 3.2% in the fourth quarter of 2008, much higher than the consensus estimate of 2.1%.  Meanwhile, real compensation jumped by 15.6% in the fourth quarter, driven by a 5% wage increase and a 9.2% decrease in consumer prices.

These numbers seem great, but off course, this is actually what you'd expect in a deflationary recession.  For all the hyperbole about incompetent managers, layoffs are not actually performed at random.  They tend to target the least productive workers in the department, or the least productive departments (though of course there are many individual exceptions to that generalization).  That means that productivity rises even though output falls.  Meanwhile, the increase in real incomes is being driven by a general collapse in aggregate demand that has lowered prices for most classes of goods.

This highlights the ironic fact that recessions can make many, or even most people materially better off, because wages are sticky downward and prices are much less so.  Most of what recessions do is deepen the gap between the haves and the have-nots.  Those who have a job may experience declining costs and actually improve their purchasing power.  But the number of the unemployed rises, the length of the time required to find a new job stretches out, and the net decrease in their welfare far outstrips the moderate increase in the purchasing power of most consumers.  Plus, of course, the fear of the abyss among those who aren't in it takes a sizeable toll on welfare.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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