New Productivity Data

Data on labor productivity came out Thursday morning: up by 3.2% in the 4th quarter.

Increased productivity is desirable, but by itself, this piece of data isn’t good or bad. It can reflect 3 things:

• Technological improvements
• The worst workers were fired first in the recession, making it easier for the remaining workers to post better productivity gains.
• The retained workers are covering their butts by working harder.

One way to interpret this is to compare it with compensation. Managers are inclined to retain workers whose productivity gains exceed the growth of their compensation. The difference is unit labor costs. Last quarter compensation was up by 4.7%, so unit labor costs were up by 1.5%. This isn’t good. (FWIW: FoxNews gets this backward by asserting that unit labor costs being less than productivity gains is good).

Another way to interpet it is to compare productivity gains to real GDP or some other measure of output. Again, productivity is outstripping our ability to buy it and consume it. This isn’t good.

So what we have here is a good thing – the productivity gain – that is bad at this time because the economy doesn’t seem to be able to “digest” it.