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Watch out for falling productivity?


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March 09, 2007

Watch out for falling productivity?

Michael Mandel

I just did a column for BW, where I argued that the continued fall in productivity growth is a bigger danger to the economy than a housing slump. Take a look, let me know what you think.

05:26 PM

Macro

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Michael - link to article isn't working.

Posted by: Mark Thoma at March 9, 2007 09:03 PM

This is a very informative article about an extremely important issue. I have two questions: (i) To what extent is the productivity slowdown already reflected in labor costs and firms' profit margins; (ii) Given the profound implications, why aren't the markets and policymakers paying enough attention to it? Thanks.

Posted by: mkumar at March 10, 2007 04:20 PM

Thanks Mark, fixed it

Posted by: Mike Mandel at March 11, 2007 07:36 AM

I suspect the importance of relatively short term labor productivity numbers is overrated. The assumption is always that productivity is a function of the production technology. In fact, in manufacturing it is probably more a function of the changing labor input. In an economic trough, a factory may be running a single normal shift. As demand picks up, they add overtime. Eventually, however, they add a second shift. Their timeclock labor hours increase dramatically and their measured productivity falls. Service industries are more tricky because in general there is no way to measure output. For industries like banking, output is simply taken as equal to total inputs. Thus their output/input ratio is always 1. The amount of pure labor input may be fixed as well. Consulting seldom offers any economies of scale and an increase in consulting services realtive to the total size of the economy will always be a drag on measured productivity.

Posted by: Ned Schrems at March 12, 2007 10:55 AM

Dear Dr. Mandel (checking the AEA directory, I see we're fellow alumni): Your "Real Threat" in the most recent hard copy BW says, "No economic forecaster, as far as I know, foretold the productivity acceleration of the mid-1990s..." Well, maybe you're right, because economic forecasting is way above my pay grade. But in my 1984 MIT Press book, Innovation and Growth, p. 258, I assert, "Despite the sparse evidence, I am persuaded that we have run into a period of diminished technological opportunity, at least in many fields. I am also optimistic, from observing recent scientific advances, that the situation will reverse some time during the 1980s..." The chapter that follows, written in 1978, reviews the prognosis on fields of technology and lists semiconductors etc., optical fiber message transmission, and several others as fields of promise. I suspect you'd find others who were working seriously on the productivity slump of the 1970s who made similar observations -- e.g., Martin Baily and Bill Nordhaus. But I haven't kept consistent records. At last week's NBER productivity workshop, the consensus was with you -- that we're in for a period of slower growth. Just letting you know that someone out there is reading. F. M. Scherer.

Posted by: F. M. Scherer at March 12, 2007 10:58 AM

Dr. Scherer...

Thanks for the note...I stand corrected.

Posted by: Mike Mandel at March 12, 2007 01:26 PM

Ned,

Properly adding a second shift to cover higher demand would greatly increase productivity not decrease it. This is because it is a better utilization of property, plant, and equipment. Higher sales and 24 hr operations mean a greater return on assets.

Posted by: Joe Cushing at March 12, 2007 11:51 PM

Mike

Before you stand overly corrected, think about this. There are 6 billion people on the planet. Everything that has ever happened has been "predicted." Just because someone writes that something is going to happen and then it happens, doesn't mean it was accurately predicted. What it means is that for every possible outcome, there is a person who believes it will happen before it does. After it happens we give that person credit for predicting. How do we know if it was a prediction or a lucky guess? After all, if they turned out to be wrong we would be lauding those who "predicted" the opposite. Even the people who invent the stuff don't know what it will be used for. Thomas Edison predicted that the phonograph would primarily be used for in the office for dictation and that recording music was not important.

Posted by: Joe Cushing at March 13, 2007 12:09 AM

Is there any reason to think that we aren't heading into another "productivity slump?" Is there any reason to think that productivity gains aren't cyclical?

Sometimes, I think economists forget that they're dealing with humans underlying all those numbers. Humans have physical limitations; e.g. despite the productivity gains computers bring, humans can only read text on screens so fast and can only type so fast. Eventually any technology runs into human physiological limitations which make added technology of that type of limited (or no) gain. The newest computers may well be dramatically more powerful than those from 1997, but that "slow" 10-year-old computer can still run Microsoft Word faster than any human really can fully exploit. Eventually, we may well (and often do) find a work-around that limitation that lets productivity grow at a more rapid rate, but we can't forget about those stop-points.

Posted by: Brandon W at March 13, 2007 08:59 AM

Could the changes in productivity be influenced by the labor of undocumented workers? They contribute to output, but are not counted as part of the workforce. By definition, there is no easy way to count the undocumented, but perhaps a surrogate could be found. I recall a recent headline that remittances to Mexico were down last quarter for the first time in years. Due to crackdown on illegal immigration? Perhaps remittances correlate with productivity gains because they have the same cause; more illegal workers in the U.S.

Posted by: Godzilla at March 13, 2007 04:50 PM

In the above comment godzilla pointed to a reduction in remittances from undocumented foreign worker. I think he may have hit upon one part of a larger group of undocumented workers. Not (part time) but those that do not report any direct income and do not require full employment but only supplemental income. Those no longer even counted as unemployed who are still working in the under the table economy. With these 12 million extra workers in the work force many who are - often under or totally not reported - but still fully employed at there level of effort and need. It may be that this level of extra effort is now built into what was once economic sectors stretching to gain extra productivity that no longer need that level of production. Because of this lower the wage extension of the economy. We are with these extra workers in the work force maybe not seeing what is now full employment.

Posted by: Mike Reardon at April 3, 2007 03:10 AM


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