I wrote the other day about the seeming disconnect between the employment data and the GDP growth (or lack of growth) figures. There is no way that the economy could be as stagnant as it is while employment continues to grow. I got one rather irate response that I had ignored the decline in productivity which would explain the entire matter. The response was a bit more nuanced, but at its essence, it really was just a suggestion that productivity declines explain everything.
I spent some time speaking to the fellow who was pointing to productivity and learned that he did not actually understand how productivity is measured or defined. Nevertheless, the point does merit a response.
Simply put, there is no way that productivity explains the difference between GDP stagnation and employment growth. Think about it. A decline in labor productivity means that it takes more hours of labor to produce the same output. There are times when labor productivity does decline, but they do not come along frequently. The owner of a business making the proverbial widgets (that all economists seem to love) will not be happy to see his labor costs rising while he gets no additional output. The basic rule of economics is that if the cost of something rises, its usage goes down. In other words, as labor productivity declines, there should be a push towards using less, not more, labor. That would lead to higher unemployment and fewer jobs, just the reverse of what the government statistics tell us is happening.
There could be a situation where the business is seeing declining sales, so production is lowered by a bit. If hours worked stayed unchanged, then the labor productivity could decline without there being a decrease in the number of people employed. On an economy wide scale, that often happens at the very start of a recession, right before the layoffs begin. The decline in productivity never, however, accompanies an increase in employment.
Sadly, the best explanation for the difference between GDP stagnation and employment growth is that the statistics are wrong.
I spent some time speaking to the fellow who was pointing to productivity and learned that he did not actually understand how productivity is measured or defined. Nevertheless, the point does merit a response.
Simply put, there is no way that productivity explains the difference between GDP stagnation and employment growth. Think about it. A decline in labor productivity means that it takes more hours of labor to produce the same output. There are times when labor productivity does decline, but they do not come along frequently. The owner of a business making the proverbial widgets (that all economists seem to love) will not be happy to see his labor costs rising while he gets no additional output. The basic rule of economics is that if the cost of something rises, its usage goes down. In other words, as labor productivity declines, there should be a push towards using less, not more, labor. That would lead to higher unemployment and fewer jobs, just the reverse of what the government statistics tell us is happening.
There could be a situation where the business is seeing declining sales, so production is lowered by a bit. If hours worked stayed unchanged, then the labor productivity could decline without there being a decrease in the number of people employed. On an economy wide scale, that often happens at the very start of a recession, right before the layoffs begin. The decline in productivity never, however, accompanies an increase in employment.
Sadly, the best explanation for the difference between GDP stagnation and employment growth is that the statistics are wrong.
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