Sunday, December 5, 2010

Eventually, Labor Will Be Needed to Meet Output

As everyone is familiar with, the productivity spike following the economic downturn was initially met with a HUGE drop in hours worked and employment. As detailed previously:

The initial increase in productivity was never due to doing more, with less. It was doing less with (an even larger) less.
The below chart shows that things have evolved (for the good) and that both productivity and hours worked have increased year over year.



Now compare the above year over year figures with the below quarter over quarter (annualized) figures. What we see is that productivity growth (and output) remains strong, but at a decreasing rate.



Shown another way (subtracting the year over year growth in chart 1 from the quarter over quarter growth in chart 2) and we can see clearly that the pace of growth in output has decreased as productivity has decreased and hours worked have not increased enough to offset the decline (again this is in terms of the second derivative of output - there is still outright growth).



What does this all mean to me?

Well, the manufacturing portion of the charts are an interesting study because the collapse in manufacturing was larger and the rebound swifter (though still WAY below the old trend). What initially happened was a huge spike in productivity as jobs were shed by the millions. Later, productivity continued to increase while hours worked eased higher (not necessarily through hiring). When manufacturers got all they could out of this remaining workforce, to meet demand they were forced to... wait for it... actually hire (hence, the jump in labor cost per unit).

This is what is happening, albeit more slowly, in the broader economy. The problem is there is still so much excess capacity in the system that companies are still able to squeeze more out of their existing labor force (i.e. there is still room for additional productivity growth and hours to be increased). I do think we are fast approaching the inflection point as cost cutting has run its course and corporations are now looking to grow the top line to grow profits. Considering the limited investment over the past few years, to meet output (it is my hope) corporations will need to once again rely on labor.

Source: BLS