Down on the Nonfarm: A Poetics of Productivity

Productivity growth exhibits significant slowing, a scenario G. Love has warned of over and over.
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Publish date:

Hugh and Alan

JACKSON HOLE, Wyo. -- The

nonfarm productivity

numbers for the second quarter were

released this morning. (See yesterday's

column for a productivity primer.)

And today we feature Four

Greenspan

quotes and a Table.

Despite the remarkable progress witnessed to date, history counsels us to be quite modest about our ability to project the future path and pace of technology and its implications for productivity and economic growth. We must remember that the pickup in productivity is relatively recent, and a key question is whether that growth will persist at a high rate, drop back toward the slower standard of much of the last 25 years, or climb even more. By the last I do not just mean that productivity will continue to grow, but that it will grow at an increasingly faster pace through a continuation of the process that has so successfully contained inflation and supported economic growth in recent years.

For, if productivity growth should level out or actually falter because additional technology synergies fail to materialize, or because output per hour has been less tied to technology in the first place, inflationary pressures could reemerge, possibly faster than some currently perceive feasible. ... For, obviously if productivity growth slows, unit labor costs would rise, first pressuring profit margins, and then prices. Indeed, we cannot rule out such a process if labor productivity growth simply levels out. Our ability to forecast, when a diminishing pool of potential workers begins to raise costs or when productivity trends change, is limited. We do know, however, that if, and when, either materializes, inflation pressures are likely to again surface.

I said the evidence for technology-driven acceleration in productivity is compelling, but not conclusive. Indeed, there are a large number of economists who doubt that the rise in productivity growth is anything more than a cyclical phenomenon or some type of statistical aberration. To be sure, they say, nonfarm productivity growth has risen in recent years, but they note that there have been other periods in our postwar records that exhibited similar patterns of acceleration only to fall back to subnormal growth. Many analysts offer as the explanation of the recent acceleration the slow pace of labor productivity growth earlier this decade. The current surge is judged a mere catch-up. The recent acceleration is admittedly not sufficient proof of an irreversible trend for a variable as statistically volatile as labor productivity.

The rapid increase in aggregate demand has generated growth of employment in excess of the growth in population, causing the number of potential workers to fall since the mid-1990s at a rate of a bit under 1 million annually. We cannot judge with precision how far this level can decline without sparking upward pressures on wages and prices. Accelerating productivity may have appeared to break the link between labor market conditions and wage gains in recent years, but it cannot have changed the law of supply and demand. ... At some point, labor market conditions can become so tight that the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will then eventually begin to accelerate.

Side Dish

Hey. Let's hear from you

Chicago

people in the poll today.

And hey.

G. Love

used the

word "productivity" 33 times in the July

testimony alone.

Best dog?

Devil.

Under.

Dodger.

Old Yeller.

Gold Coast.