I don’t worry too much about occasional downs in macroeconomic statistics, as long as they are mostly ups. Three in a row gets my attention though.
Productivity probably should be the key macroeconomic statistic. After all, the increased productivity of individual workers is the only reason that anyone can afford to pay them more in real terms.
The thing is, productivity isn’t the key statistic because we can’t measure it directly. Instead we measure it as a residual. We track output growth first, then we subtract out how much of that has to do with growth in employment and hours. From that we subtract out how much has to do with growth in amount and utilization of capital. What’s left is improvements in productivity (usually attributed to improved technology). So, productivity is a little dicey.
Nonetheless, government statisticians are careful about their data and methods, so while we may treat a productivity growth number as imprecise, we think that evens out over several consecutive measurements.
So, why on earth would productivity be slowing down? Determining causality here is problematic. What we do in practice is run through some plausible explanations.
First, could technology be going backwards? This seems unlikely. Just look around. Some would argue that the technological improvements we are making are just not that important (it’s summer of 2016, so the big new thing is Pokémon Go), and maybe that’s true. Personally, I’m always leery of just-so stories about how the present is horrible and the past was so much better. Nonetheless, there is a serious macroeconomic research looking into this possibility (like this).
Second, are our machines not working properly? The statistic to look at here is capacity utilization. This shows roughly what percentage of available hours the available machinery is working, so higher is better. This has been on a downward trend for decades, and we’re not sure that’s a bad thing. It does mean that we should probably focus on the last decade or so though. Now, the way this relates to productivity is that if capacity utilization is higher, productivity might be lower because we’re pushing the more marginal machines into production. This does not seem to be the case: capacity utilization has been falling for about a year. Maybe we pushed our machines too hard a year or two ago, and we’re seeing the consequences now … but that’s stretching a bit, don’t you think?
Third, are our people not working properly? Maybe productivity, averaged across all of us, is faltering because some of us just stink at working.
Macroeconomics is a craft that one practices. No one ever really knows anything for certain. But the idea with a craft is that you practice to get better at noticing the details and taking care of them. And for my money, that last one is the explanation that’s holding water for me.
Our labor force is near, or at, full employment, with our unemployment rate hovering below 5%. Firms say that have lots of jobs (you have to dig into the JOLTS data a bit to find this) but have trouble finding people with the skills needed to fill them (job openings are going up faster than job hires). Taken together, these tend to suggest that firms are scraping the bottom of the barrel with their new hires. A third factor to add is that, demographically, the baby boomers are starting to retire in large numbers. They take their experience with them, and this is hurting some firms.
The question that needs to be addressed then, is whether what we’re experiencing is 1) merely the tempoarily heavy replacement of experienced workers with inexperienced ones (if a demographic change that’s going to take a couple of decades to play itself out is best described as temporary), or 2) solid evidence that a larger than normal chunk of the population simply isn’t worth employing. Productivity data is pretty volatile, but a quick graph I produced on the BLS website shows that productivity has been in negative territory quite a bit during the Obama expansion. For as long as I can remember, society has been complaining about an underclass of people who don’t fit into the working world. I used to regard that as just grousing, but now I wonder if that group is finally large enough to make an observable difference.