Productivity Still Growing, but at Slower Pace

Output continued to outpace hours worked in the first quarter, as labor productivity kept growing. Its growth rate was 2.8% last quarter, according to the Bureau of Labor Statistics. That's the lowest rate we've seen in a year. It grew by 6.3% in the final quarter of 2009. Lower productivity might sound like a bad thing, but its decline is inevitable as the labor market recovery begins and output returns to a more sustainable pace.

During the recession, employers eliminated a lot of jobs. As the economy began to improve, hiring didn't keep up with the additional output demanded. That drove up productivity, which is the measure of output per hour worked. You can see this through the steep rise in productivity since the recession began:

Productivity cht1 2010-Q1.PNG

Although productivity continued to grow last quarter, it did so at a lower pace than in the past few quarters. Productivity growth slowing, in part, indicates that employers are finally beginning to take on more workers. Hours grew by 1.1%, compared to 0.7% growth in the fourth quarter. That isn't the whole story, however, as output didn't grow as quickly -- by 4.0% in the first quarter, compared to 7.0% in the quarter prior.

The following chart shows the relation between productivity and unemployment:

Productivity cht2 2010-Q1.PNG

As you can see, productivity growth has declined significantly over the past few quarters. It looks like it peaked in the third quarter of 2009. Unemployment likely reached its highest level in the quarter that followed. Thus, productivity's decline should slightly lead that of unemployment, assuming that output doesn't decline. You can see this relation in the history shown on the chart. For example, the recession in the early 1990s saw a peak in productivity just before unemployment began a steady decline.

So really, slower productivity growth isn't necessarily bad. It indicates that employers are starting to hire at a rate that better captures economic demand. There's still obviously a lot more hiring that needs to take place, considering how high productivity has been since 2008. If the correlation shown in the second chart above holds up, unemployment should continue to decline, as long as output stays reasonably high.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Business

Just In