The Latest Labor Productivity Data and Why it Matters

By SBE Council at 6 May, 2021, 10:14 pm

by RAYMOND J. KEATING -

Labor productivity is a rather straightforward concept, but at times, such as over the past year-plus, it requires some drilling down to acquire a proper interpretation.

WHY LABOR PRODUCTIVITY MATTERS

As explained by the U.S. Bureau of Labor Statistics (BLS), 'Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers.' Growth in labor productivity is the change in goods and services produced per hour worked.

Economists watch labor productivity given that worker earnings, business profitability and economic growth are all closely tied to productivity. Yes, productivity very much matters.

For good measure, productivity is perhaps the clearest measure that debunks the political myth that workers and business owners are at fundamental odds. After all, both employees and owners gain from investments in technology, equipment, tools, facilities, efficiencies, improved management, education and development of skills.

In the real world of business, success comes because owners and employees work together to enhance productivity - with gains in both profits and wages resulting.

GETTING THE RIGHT TAKE ON LABOR PRODUCTVITY

Again, though, during tough economic times, changes in labor productivity can be a bit tricky to properly interpret.

For example, the 2020 productivity data were skewed dramatically due to the pandemic and economic shutdowns. In the second quarter 2020, nonfarm labor productivity (at a seasonally adjusted annual rate) jumped by 11.2 percent. But that big growth number resulted from a 36.8 percent decline in output and a 43.2 percent decline in hours worked.

For all of 2020, productivity grew by 2.5 percent, but again, output fell by 4.2 percent and hours worked by 6.6 percent. Nothing positive there. And to add to the productivity puzzle during tumultuous times, in the fourth quarter of 2020, output grew by 5.8 percent, but since hours worked jumped by 10.0 percent, productivity actually fell by 3.8 percent.

While emerging from and moving beyond the pandemic economy, we want to see growth in output and hours worked resulting in strong productivity growth.

Latest Data Shows Robust Growth: That's what happened in the first quarter of 2021, according to the latest report from the BLS. Output grew by 8.4 percent, and hours worked by 2.9 percent. As a result, nonfarm labor productivity grew by a robust 5.4 percent.

In the post-World War II era, annual growth in nonfarm labor productivity has averaged 2.2 percent. Unfortunately, once we factor out the anomalous years impacted by the Great Recession and the pandemic, the U.S. hasn't experienced that level of labor productivity growth since 2006.

GROWTH IN LABOR PRODUCTIVITY IS CRITICAL AND POLICIES MATTER

Looking ahead, enhancing labor productivity will be vital for workers, businesses and the overall economy. And as already noted, such productivity growth depends a great deal on the investments made by entrepreneurs and businesses in technology, equipment, tools, facilities, efficiencies, improved management, and so on.

These economic realities should give the Biden administration and Congress serious pause in moving ahead with an agenda focused on raising taxes and increasing regulations on entrepreneurs, businesses and investors.

If policymakers are serious about economic recovery and expansion, including enhancing the incomes earned by workers, then the policy discussion should be centered on reducing governmental barriers to entrepreneurship, investment and innovation. That is, don't increase tax and regulatory burdens, but instead provide substantive and permanent tax and regulatory relief.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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