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(What’s Left of) Our Economy: The U.S. Labor Productivity Picture Has Gotten Historically Bad

07 Sunday May 2023

Posted by Alan Tonelson in (What's Left of) Our Economy

≈ 1 Comment

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inflation, Labor Department, labor productivity, non-farm business, productivity, total factor productivity, {What's Left of) Our Economy

I hope you didn’t blink (figuratively) during America’s latest stretch of improvement in labor productivity. Because it’s over after only two quarters, at least according to the new Labor Department report containing the preliminary results for the first quarter of this year. Indeed, this barometer of efficiency has never been worse for an extended period. 

That’s really bad news because strong productivity growth of both kinds tracked by the U.S. government (labor, which measures the output of one hour’s worth of work by a single worker; and total factor, which measures how much output is being generated a wide variety of inputs ,including labor) is the economy’s best hope for creating sustainable prosperity and for keeping inflation under control.

But after improving at an annualized rate of 1.18 percent in the third quarter of last year and 3.16 percent by the same measure in the fourth quarter, labor productivity in non-farm businesses (the Labor Department’s headline category) dropped by an annualized 2.78 percent in the first quarter of this year. And as bad as that sounds, it’s the worst such result only since the second quarter of 2022, when it sank by an annualized 3.77 percent.

The latest actual year-on-year changes are even more discouraging. Let’s let the Labor Department release speak for itself:

“From the same quarter a year ago, nonfarm business sector labor productivity decreased 0.9 percent….The 0.9-percent productivity decline is the first time the four-quarter change series has remained negative for five consecutive quarters; this series begins in the first quarter of 1948.”

And in historical context, the economy’s labor productivity performance since the beginning of the recovery from the CCP Virus’ devastating first wave, in the third quarter of 2020, is more awful still. For since the 1990s, the United States has transitioned from a country whose labor productivity had been growing respectably to one in which it’s decreasing in absolute terms.

Here are the total numbers for the economic expansions since the 1990s. (As known by RealityChek regulars, comparing similar stages in economic cycles sheds the most light on the actual trends and developments.)

1990s expansion (2Q 1991-1Q 2001): +25.02 percent

bubble expansion (4Q 2001-4Q 2007): +16.01 percent

pre-CCP Virus expansion: (3Q 2009-4Q 2019): 11.92 percent

post-CCP Virus expansion: (3Q 2020-1Q 2023): -1.99 percent

So clearly, even though the economy is still being roiled by the pandemic’s aftermath, and its effects will keep fading at least until the next pandemic, there’s plenty to worry about on the labor productivity front. The more so since there’s no evidence that many U.S. leaders or even economists are proposing plausible ways to get labor productivity out of its literally historic doldrums – or even talking about the problem.

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(What’s Left of) Our Economy: New Figures Show that America is Still Pretty Unproductive

02 Thursday Mar 2023

Posted by Alan Tonelson in (What's Left of) Our Economy

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CCP Virus, coronavirus, COVID 19, inflation, labor productivity, manufacturing, non-farm business, productivity, recession, total factor productivity, Wuhan virus, {What's Left of) Our Economy

Let’s start off with the good news revealed by today’s final (for now) official U.S. report on labor productivity in the fourth quarter of 2022 and the entire year last year: The quarterly readings have now improved for the fourth consecutive time, and have even showed actual growth for the second straight quarter.

That’s sure better than America’s performance earlierin 2022 for this narrowest of the two productivity growth gauges tracked by the U.S. government. Last year’s first half featured the first quarter’s 6.1 percent drop at annual rates (tying the second quarter, 1960 for the worst such performance ever in a data series going back to 1947) and a second quarter 3.8 percent annualized decrease that created the worst back-to-back results ever.

And any positive productivity news is important any time because robust productivity gains are the country’s best bet for achieving sustainable prosperity rather than the bubble-ized veneer of economic success. Moreover, any positive productivity news these days is especially important, because enough improving efficiency on this score would cool off inflation. For all else (particularly demand levels) equal, it would enable businesses to absorb higher costs for labor and other inputs and still maintain their profits rather than being forced to preserve profitability by raising prices charged to consumers and other final customers.

But that’s it for this morning’s good productivity news.

Although the new fourth quarter rise of 1.7 percent annualized (for non-farm businesses – the government’s closest proxy for the entire private sector economy) was the best since the three percent improvement registered in the fourth quarter of 2021, it was 1.3 percentage points lower than the three percent reported in the advance release.

Further, the 1.7 percent yearly fall-off in labor productivity between 2021 and 2022 was the greatest such weakening since the same decrease in 1974.

Although there’s no legitimate doubt that recent productivity data are still reflecting CCP Virus-related distortions that presumably will fade significantly at some point, the latest number’s unfortunately provide no reasons to think that America’s long-time productivity growth slump will end any time soon. Here are the results, incorporating new “benchmark” revisions for the last few years, for all the expansions that the U.S. economy has enjoyed since the 1990s. (As known by RealityChek regulars, the most reliable economic comparisons are those among the same periods of business cycles.)

1990s expansion (2Q 1991-1Q 2001): +23.53 percent

bubble-decade expansion (4Q 2001-4Q 2007): +16.01 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 13.56 percent

post-CCP Virus expansion: (3Q 2020-4Q 2022): -1.32 percent

Again, maybe American business is still suffering from pandemic era doldrums. But obviously something awfully dramatic is going to have to change to reverse this discouraging trend.

Even worse, as I see it, have been the latest results in manufacturing labor productivity. The reason? As the table below shows, industry used to be far and away the nation’s productivity growth leader – at least until the pandemic struck.

1990s expansion (2Q 1991-1Q 2001): 44.70 percent

bubble-decade expansion (4Q 2001-4Q 2007): 31.05 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 2.11 percent

post-CCP Virus expansion: (3Q 2020-4Q 2022): -1.00 percent

Since the post-pandemic recovery, manufacturing’s labor productivity swoon has been marginally milder than that for non-farm business overall. But for the last two quarters of 2022, its perfomance has been worse, as its labor productivity has sunk by 3.9 percent and 2.7 percent at annual rates. And in fact, it’s fallen in absolute terms for five of the last six quarters.

But maybe the broader measure of productivity growth, total factor productivity (TFP) growth, yields better results? TFP measures how much expansion of output businesses are getting from the use of man different inputs – materials, energy, technology, capital spending, and the like, as well as labor. So it provides a more complete picture of business efficiency. But the TFP numbers only come out annually, and with more of a delay than the labor productivity results.

Yet even keeping in mind the inability to generate TFP growth statistics for the precise extent of expansions, and the delay factor, the results we do have so far don’t differ substantially from the labor numbers in terms of the long-term weakening – especially of manufacturing. Here are the results for non-farm businesses for the closest annual approximations of recent economic expansions:

1990s expansion: 1991-2000: 10.11 percent

bubble-decade expansion (2002-2007): 6.65 percent

pre-CCP Virus expansion: (2009-2019): 6.06 percent

post-CCP Virus expansion: (2020-2021): 4.13 percent

And here are the same results for manufacturing:

1990s expansion (1991-2000): 15.64 percent

bubble-decade expansion (2002-2007): 11.67 percent

pre-CCP Virus expansion: (2009-2019): 1.55 percent

post-CCP Virus expansion: (2020-2021): 3.26 percent

Since the deep pandemic-induced recession of 2020, TFP growth looks pretty impressive. But we only have a single year’s worth of data. And the 2022 numbers don’t come out till March 23. Most economists agree that productivity is the hardest of the economy’s standard performance indicators to measure, so even the upcoming TFP report may contain some big encouraging surprises. And even if it doesn’t, it’s conceivable that it’s missing much of the real productivity story.

Yet since both measures used by the government are in basic agreement, that last argument isn’t one I find persuasive. Worse, as long as American productivity growth remains crummy – and possibly non-existent – fostering a dramatic economic slowdown and quite possibly a recession will be the only ways to defeat today’s troubling inflation.

Im-Politic: The Regime Media’s Illegal Aliens Cover-Up Continues

21 Tuesday Feb 2023

Posted by Alan Tonelson in Im-Politic

≈ 3 Comments

Tags

Biden border crisis, child labor, Financial Times, illegal aliens, Im-Politic, Immigration, labor productivity, Mainstream Media, meatpacking, productivity, Regime Media, UniParty, Washington Post, workers

The evidence keeps mounting that the Uniparty’s Regime Media will stop at almost nothing to cover up the costs of illegal immigration to the U.S. economy and American society. Just yesterday, as I tweeted, the Financial Times published a report claiming that a labor shortage fueled in large measure by flows of legal and illegal immigrants allegedly so inadequate that resulting worker shortages are imperiling President Biden’s infrastructure and manufacturing revival plans.

Only one problem: The reporter and her editors completely failed to mention that the wages offered by U.S. construction firms have gone exactly nowhere at best lately – which is hard to square with the idea that they’re desperate to hire.

And this morning, I noticed a Washington Post report on the shameful reappearance of illegal child labor in the United States – including child employees exposed to dangerous working conditions – that buried unmistakable signs that continuing inflows of illegal aliens obviously enabled by President Biden’s lax border enforcement policies bear at least much of the blame.

In the fifth paragraph, the article states that

“Child labor violations have been on the rise in the United States since 2015. The number of minors found to be employed in violation of child labor laws shot up by 37 percent between 2021 and 2022. The number of children found to be illegally employed in hazardous occupations, such as meatpacking and construction, spiked by 93 percent over the past seven years.”

That’s certainly important to know. And in the following graph, readers learn that “Experts say a historically tight labor market could be fueling this rise in violations, with employers tapping into new labor pools to fill vacancies across a variety of industries.”

But it’s not until paragraph seventeen that the piece even obliquely mentions the illegal aliens angle:

“Many of the children [working at the meatpacking facilities focused on in the article] spoke only Spanish, and at least some Labor Department interviews with minors were conducted in Spanish, investigators [who were probing labor law violations for the federal government] said.”

Yet the article still never disclosed why these unilingual children are in the country to begin with – no doubt because their presence is surely unlawful, and a testament to the humanitarian impact of the Open Borders-friendly immigration policies pushed so avidly and for so long by major U.S. news organizations.

Also conspicuously overlooked in this Post report – the harmful economic impact of the long-time absence of sensible immigration policies. In this case, strong productivity growth is the casualty, which matters decisively because ever greater efficiency is a key – and probably the most important key – to America’s ability to generate high and rising living standards. And the evidence could not be clearer that the ready availability of illegal alien labor has enabled the nation’s meat-processing industry to remain profitable without automating or shaking up management or reconfiguring its production lines or taking any other major steps to modernize.

I last looked at that sector’s lagging performance in labor productivity (where the data is most up to date) in May, 2020, and here’s where the situation stands now: In the non-durable manufacturing sector, where meat processing is found, from the first quarter of 1987 through the fourth quarter of last year improved by 71.62 percent. But between 1987 and 2021, it rose in “animal slaughtering and processing” by just 13.98 percent.

And for those doubting the illegal immigrant connection, this 2021 Fact Sheet, issued by an organization bent on highlighting “the many different ways that undocumented immigrants contribute to the food supply chain in the United States,” puts the number of illegal alien workers in slaughtering and processing companies at 82,700 in 2019. If that’s accurate, then according to the official employment data for that sector, that came to nearly one in every five employees at year!

The bottom line:  The resumed illegal immigration tide fostered by the Biden administration has helpd bring about resumed economic woes and exploitation. If I was shilling for the Cheap Labor Lobby, or ideologically wed to Open Borders, I guess I’d want to cover that up, too.   

(What’s Left of) Our Economy: The New Productivity Numbers Look Awfully Inflation-y

07 Wednesday Dec 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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consumers, demand, Federal Reserve, inflation, Labor Department, labor productivity, non-farm business, productivity, supply, {What's Left of) Our Economy

The new official U.S. figures on productivity growth are a good-but-mostly-bad news story.

The good news is that, at least for now, the American economy’s efficiency by this measure is no longer sinking like a stone – which was a real fear based on the absolute sequential declines recorded in the first and second quarter.

Further, even the feeblest improvement in productivity deserves applause because a more productive economy is (a) one better able to spur higher living standards on a sustainable basis; and (b) one less vulnerable to inflation (because it’s better able to close the gap between Americans’ demand for goods and services and the supply that’s available).

In addition, in the second quarter, labor productivity (which RealityChek regulars know is the narrower but timelier data tracked by Washington) sagged year-on-year by 2.06 percent. That figure for non-farm businesses (the Labor Department’s headline category) was slightly upgraded from the preliminary second quarter result, but that was still, as Labor reminded, “the largest [such] decline in the series, which begins in the first quarter of 1948.”

This morning’s data, the final (for now) numbers for the third quarter, show that  non-farm business labor productivity was off by just 1.25 percent on an annual basis. Moreover, on a sequential basis, labor productivity broke a two-quarter losing streak. After plummeting by 6.02 percent annualized in the first quarter and 4.13 percent at annual rates in the second, it grew by percent.

But the bad news is that this recent, ongoing annual decrease in non-farm business labor productivity has come on the heels of a long period of weakening U.S. performance on this front. Here are the numbers for total non-farm busnesses productivity growth presented for the last few stretches of American economic expansion (which generate the best apples-to-apples statistics):

1990s expansion (2Q 1991-1Q 2001): +23.53 percent

bubble expansion (4Q 2001-4Q 2007): +16.01 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 13.60 percent

And even though since the deep but brief pandemic-induced downturn ended in the second quarter of 2020, and the economy has remained massively distorted by the virus and its after effects, it’s still worth noting that since then, non-farm business productivity has sagged by 1.44 percent. This lower efficiency means, all else equal, that the economy has become less able to increase supply as fast as demand has grown, and therefore is more inflation-prone.

As also known by RealityChek regulars, the productivity statistics should be viewed at least somewhat skeptically, since especially when it comes to the service sector that dominates the U.S. economy, output per hour per worker (which yields the labor productivity numbers) is difficult to quantify. But the recent productivity deterioration has been so marked for so long that it can’t be seriously challenged. And until someone figures out how to get U.S. productivity growing vigorously again, expect too many dollars in the nation’s economy to keep chasing too few goods and services (a classic definition of inflation), and the price of these purchases to remain way too high for comfort – unless and until the Federal Reserve’s efforts to tame inflation really do succeed by crushing consumers’ buying power.      

(What’s Left of) Our Economy: America’s Long-Time Productivity Slump Looks Like it’s Deepening

09 Tuesday Aug 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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CCP Virus, coronavirus, COVID 19, inflation, Labor Department, labor productivity, productivity, total factor productivity, wages, {What's Left of) Our Economy

Since strong productivity increases are America’s best hope for improving living standards, sustainable prosperity and robust non-inflationary economic growth, it’s clearly bad news that the nation may be on the edge of a productivity growth cliff – and staring into a canyon. That’s the clear message being sent by the new official U.S. preliminary data on labor productivity for the second quarter of this year released by the Labor Department this morning.

At least as bad: The lousy labor productivity figures strengthen the case that even though U.S. wages aren’t rising nearly as fast as living cost, they still could be fueling some of the torrid inflation of the last year and a half or so.

There’s a possibility that this dreadful performance is just another hangover from the CCP Virus pandemic and related lockdowns and curbs on individuals’ voluntary activity (along with the massive covid relief measures provided by Washington), which has played havoc with the entire economy and the data used to monitor its health. But it’s crucial to remember that the nation is also suffering a long-term productivity growth slump, so any virus distortions aren’t reflected in the numbers may not be game-changing.

As known by RealityChek regulars, labor productivity is the narrower of the two measures of efficiency tracked by Labor, and measures the output of each worker per each hour on the job. The Department itself made clear how awful the second quarter results were for the non-farm business sector – the numbers that are followed most closely:

“The 2.5-percent decline in labor productivity from the same quarter a year ago [actually, it was 2.55 percent] is the largest decline in this series, which begins in the first quarter of 1948.” (Actually, the Department’s own raw data tables go back to the first quarter of 1947.) Let’s all agree that a 75-year all-time worst is really alarming.

The quarterly figures were stomach-turning, too. Labor productivity sank at an annual rate of 4.71 percent sequentially – the fifth biggest such drop ever. Further, this followed on the heels of the first quarter’s sequential 7.64 percent nosedive – the second worst since the 12.26 percent crash of the third quarter of 1947.

And here’s some thoroughly depressing context: Such back-to-back quarterly declines are rare. Before that latest stretch, they – or longer labor productivity losing streaks – had only happened eleven times over the last three quarters of a century.

Two consecutive declines in labor productivity aren’t the longest such stretch on record. That dubious honor belongs to the five-quarter period between the second quarter of 1973 and the third quarter of 1974. But the latest cumulative quarterly deterioration of 12.26 percent at annual rates is the worst of all time. True, it’s just slightly greater than the 12.24 percent cumulative drop suffered during that 1973-74 productivity depression. But don’t forget – the current streak may not be over yet!

As for that 2.51 percent annual decline in labor productivity, the context here is completely gloomy, too. As with the sequential results, it represented the second straight worsening – following the 0.58 percent drop in the first quarter. And two or more straight annual labor productivity decreases have only happened six times before this morning’s release.

Also as with the quarter-to-quarter figures, a stretch of two straight decreases isn’t the longest ever. Between 1973 and 1974, annual productivity fell four consecutive times. But the current annual slump is the deepest since that which lasted between the first and third quarters of 1982. And of course, today’s slump isn’t over yet, either.

As I’ve written previously, productivity is the measure of economic performance in which most economists are least confident (especially in service industries that make up the vast bulk of the U.S. economy). Further, labor productivity is a narrower measure of efficiency than total factor productivity, which measures output as a function of a wide range of inputs used by business (not only workers but capital, technology, materials, etc.) And today’s second quarter results will be revised next month (which recently I mistakenly reported as the date for these preliminary numbers), with the latest set of (annual) revisions coming this fall.

But most legitimate doubts about the productivity data mainly concern their precision, not the direction they show. And all-time worsts and near-worsts surely can’t be mainly attributed to measurement flaws. And as for the total factor results, for decades, they’ve been no great shakes, either, as made clear in the above linked RealityChek post. Maybe the revisions will substantially brighten the picture?

So far, though, that’s just a “maybe.” The best information available indicates that America’s long-time productivity woes are taking a big turn for the worse, and that in combination with recent wage increases could be embedding unacceptably high inflation – and stagnating living standards – into the U.S. economy’s foreseeable future.

(What’s Left of) Our Economy: The Worst of All Possible Inflation Worlds for U.S. Workers?

01 Monday Aug 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, labor productivity, PCE, personal consumption expenditures index, productivity, recession, stagflation, wages, workers, {What's Left of) Our Economy

The newest report on a key official measure of worker compensation has just shown that, during today’s high inflation era, American workers could be both significantly fueling the soaring prices that are dominating the U.S. economy and getting shafted by them.

This measure – called the Employment Cost Index – is tracked by the Department of Labor, and is watched closely by the Federal Reserve (the government’s chief inflation-fighting agency) for two major reasons. First, it includes not just wages, but salaries and non-cash benefits. Second, unlike the Labor Department’s average wage figures, it takes into account what economists call compositional effects.

In other words, the those wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by factoring in the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

In his press conference last Wednesday following the Federal Reserve’s announcement of a second straight big increase in the interest rate it controls directly, Chair Jerome Powell mentioned that the ECI report coming out on Friday would greatly influence the central banks’ decision on how much more tightening of credit conditions would be needed to slow the economy enough to cool inflation acceptably.

That’s because, as he has explained previously, the supposedly superior insights on worker pay provided by the ECI enable the Fed to figure out whether a major inflation engine has started to rev up – employee compensation rising faster than worker productivity. Industries (or entire economies) in this situation are denied the option of absorbing wage increases by achieving greater efficiencies in their operations Therefore, they face more pressure to maintain earnings and profits by passing pay increases onto their customers, their customers face more pressure to keep up with living costs by pushing for pay hikes themselves, and what economists term a classic and hard-to-break wage-price spiral takes off.

The new ECI results per se looked alarming enough from this perspective. They showed that between the second quarter of 2021 and the second quarter of 2022, total employee compensation for the private sector ose by 5.5 percent. That’s the fastest pace since this data series began in 2001. Moreover, this record represented the third straight all-time high. (RealityChek regulars know that private sector numbers are the most important gauge, since its pay and other indicators are mainly driven by market forces, unlike the statistics for government workers, where the indicators largely reflect politicians’ decisions.)

Sadly, though, according to the Fed’s favorite measure of consumer inflation (the Commerce Department’s Personal Consumption Expenditures price index), living costs increased by 6.45 percent. So workers fell further behind the eight ball.

Perhaps worst of all, however, productivity growth is in the toilet. We won’t get the initial second quarter figures until September 1, but during the first quarter, for non-farm businesses (the most closely followed measure for the private sector), it fell year-on-year by 0.6 percent – the worst such performance since the fourth quarter of 1993.

Nor was this figure a one-off for the current high inflation period. From the time consumer prices began their recent speed up (April, 2021) through the first quarter of this year, labor productivity is off by 1.36 percent, the ECI is up 3.95 percent, and PCE inflation has risen by 4.65 percent. So a strong case can be made that workers, businesses, and the economy as a whole are in the worst of all possible worlds.

Whenever productivity is the subject, it’s important to note that it’s the economic performance measure in which economists probably have the least confidence. And even if it’s accurate, don’t jump to blame workers for sloughing off. Maybe management is doing a lousy job of improving their productivity. Alternatively, maybe managers simply haven’t figured out how to do so in the midst of so many unusual challenges posed by the pandemic and its aftermath – chiefly the stop-go nature of the economy’s early aftermath, and the resulting turbulence that, along with the Ukraine war and China’s Zero Covid policy, is still roiling and stressing supply chains.

Whatever’s wrong, though, unless a course correction comes soon, it looks like the odds of the economy sinking into prolonged stagflation – roaring inflation and weak economic growth – are going up. And ultimately, that matters more to the American future than whether some form of recession is already here, or around the corner.

(What’s Left of) Our Economy: You Bet that Mass Immigration Makes America Less Productive

19 Sunday Jun 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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amnesty, Bureau of Labor Statistics, construction, demand, Donald Trump, economics, Forward.us, hotels, illegal aliens, immigrants, Immigration, labor productivity, productivity, restaurants, supply, total factor productivity, wages, {What's Left of) Our Economy

An archetypical Washington, D.C. swamp denizen thought he caught me with my accuracy pants down the other day. Last Sunday’s post restated a point I’ve made repeatedly – that when countries let in too many immigrants, their economies tend to suffer lasting damage because businesses lose their incentives to improve their productivity – the best recipe for raising living standards on a sustainable, and not bubble-ized basis, as well as for boosting employment on net by fostering more business for most existing industries and enabling the creation of entirely new industries.

The reason mass immigration kneecaps productivity growth? Employers never need to respond to rising wages caused by labor shortages by buying labor-saving machinery and technology or otherwise boost their efficiency. Instead, they continue the much easier and cheaper approach of hiring workers whose pay remains meager because immigrants keep swelling the workforce.

It’s a point, as I’ve noted, strongly supported by economic theory and, more important, by evidence. But Todd Schulte, who heads a Washington, D.C.-based lobby group called Forward.us, wasn’t buying it. According to Schulte, whose organization was founded by tech companies like Facebook with strong vested interests in keeping U.S. wages low, “the decade of actual [U.S.] productivity increases came directly after the 1986 legalization AND 1990 legal immigration expansion!”

He continued on Twitter, “giving people legal status and… expanding legal immigration absolutely has not harmed productivity in the last few decades in the US.”

So I decided to dive deeper into the official U.S. data, and what I found was that although there are bigger gaps in the productivity numbers than I’d like to see, there’s (1) no evidence that high immigration levels following the 1986 amnesty granted by Washington to illegal immigrants and the resulting immigration increase mentioned by Schulte improved the national productivity picture over the pre-amnesty period; and (2) there’s lots of evidence that subsequent strong inflows of illegal immigrants (who Schulte and his bosses would like to see amnestied) have dragged big-time on productivity growth.

First, let’s examine the productivity of the pre-1986 amnesty decades, which provides the crucial context that Schulte’s claim overlooks.

According to U.S. Bureau of Labor Statistics figures, during the 1950s, a very low immigration decade (as shown by the chart below), labor productivity grew by an average of 2.63 percent annually. Significantly, this timespan includes two recessions, when productivity normally falls or grows unusually slowly.

Figure 1. Size and Share of the Foreign-Born Population in the United States, 1850-2019

During the 1960s expansion (i.e., a period with no recessions), when immigration levels were also low, the rate of labor productivity growth sped up to an annual average of 3.26 percent.

The 1970s were another low immigration decade, and average labor productivity growth sank to 1.87 percent. But as I and many other readers are old enough to remember, the 1970s were a terrible economic decade, plagued overall by stagflation. So it’s tough to connect its poor productivity performance with its immigration levels.

Now we come to the 1980s. Its expansion (and as known by RealityChek regulars, comparing economic performance during like periods in a business cycle produces the most valid results), lasted from December, 1982 to July, 1990, and saw average annual labor productivity growth bounce back to 2.24 percent.

As noted by Schulte, immigration policy changed dramatically in 1986, and as the above chart makes clear, the actual immigant population took off.

But did labor productivity growth take off, too? As that used car commercial would put it, “Not exactly.” From the expansion’s start in the first quarter of 1982 to the fourth quarter of 1986 (the amnesty bill became law in November), labor productivity growth totalled 10.96 percent. But from the first quarter of 1987 to the third quarter of 1990 (the expansion’s end), the total labor productivity increase had slowed – to 5.76 percent.

The 1980s are important for two other reasons as well. Nineteen eighty-seven is when the Bureau of Labor Statistics began collecting labor productivity data for many U.S. industries, and when it began tracking productivity according to a broader measure – total factor productivity, which tries to measure efficiency gains resulting from a wide range of inputs other than hours put in by workers.

There’s no labor productivity data kept for construction (an illegal immigrant-heavy sector whose poor productivity performance is admitted by the sector itself). But these figures do exist for another broad sector heavily reliant on illegals: accommodation and food services. And from 1987 to 1990 (only annual results are available), labor productivity in these businesses increased by a total of 3.45 percent – worse than the increase for the economy as a whole.

On the total factor productivity front, between 1987 and 1990 (again, quarterly numbers aren’t available), it rose by 1.23 percent for the entire economy, for the construction industry it fell by 1.37 percent, for the accommodation sector, it fell by 2.30 percent, and for food and drinking places, it increased by 2.26 percent. So only limited evidence here that amnesty and a bigger immigrant labor pool did much for U.S. productivity.

As Schulte pointed out, the 1990s, dominated by a long expansion, were a good productivity decade for the United States, with labor productivity reaching 2.58 percent average annual growth and total factor productivity rising by 10.87 percent overall. But when it comes to labor productivity, the nineties still fell short of the 1950s (even with its two recessions) and by a wider margin of the 1960s.

But did robust immigration help? Certainly not in terms of labor productivity. In accommodation and food services, it advanced by just 0.84 percent per year on average.

Nor as measured by total factor productivity. For construction, it actually dropped overall by 4.94 percent. And although it climbed in two other big illegal immigrant-using industries, the growth was slower than for the economy as a whole (7.17 percent for accommodation and 5.17 percent for restaurants and bars).

Following an eight month recession, the economy engineered another recovery at the end of 2001 that lasted until the end of 2007. This period was marked by such high legal and illegal immigration levels that the latter felt confident enough to stage large protests (which included their supporters in the legal immigrant and immigration activist communities) demanding a series of new rights and a reduction in U.S. immigration deportation and other control policies.

Average annual labor productivity during this expansion grew somewhat faster than during its 1990s predecessor – 2.69 percent. But annual average labor productivity growth for the accommodation and food services sectors slowed to 1.19 percent, overall total factor productivity growth fell to 1.19 percent, and average annual total factor productivity changes in accommodations, restaurants, and construcion dropped as well – to 6.36 percent, 2.67 percent, and -9.08 percent, respectively.

Needless to say, productivity grows or shrinks for many different reasons. But nothing in the data show that immigration has bolstered either form of productivity, especially when.pre- and post-amnesty results are compared. In fact, since the 1990s, the greater the total immigrant population, the more both kinds of productivity growth deteriorated for industries relying heavily on illegals. And all the available figures make clear that these sectors have been serious productivity laggards to begin with.

And don’t forget the abundant indirect evidence linking productivity trends to automation – specifically, all the examples I’ve cited in last Sunday’s post and elsewhere of illegal immigrant-reliant industries automating operations ever faster — and precisely to offset the pace-setting wage increases enjoyed by the lowest income workers at least partly because former President Trump’s restrictive policies curbed immigration inflows so effectively. 

In other words, in the real world, changes in supply and demand profoundly affect prices and productivity levels – whatever hokum on the subject is concocted by special interest mouthpieces who work the Swamp World like Todd Schulte.

(What’s Left of) Our Economy: More Evidence that Pay Really is Worsening U.S. Inflation

09 Monday May 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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ECI, Employment Cost Index, Federal Reserve, inflation, Labor Department, labor productivity, multifactor productivity, productivity, recession, wages, workers, {What's Left of) Our Economy

Back in February, I wrote that although U.S. workers’ hourly wages were rising more slowly than the standard measure of consumer prices (the Consumer Price Index, or CPI), and therefore on that basis couldn’t be blamed for the recent, historically high inflation, there was one reason to be worried about the last few years’ healthy pay hikes: Such pay was rising faster than worker productivity.

I explained that this trend inevitably fueled inflation because “when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.”

And more important than my views on the subject, these concerns have been expressed by Jerome Powell, Chairman of the Federal Reserve, the U.S. central bank that has the federal government’s main inflation-fighting responsibilities.

So it’s discouraging to report that new government data on both pay and productivity have come out in the last two weeks, and they make clear that the pay-productivity gap has just been widening faster than ever.

The pay data come from the Labor Department’s latest Employment Cost Index (ECI), which tracks not only hourly wages but salaries and benefits, while the productivity figures come from Labor’s new release on labor productivity, which measures how much output a single worker turns out in a single hour. And conveniently, both releases take the story through the first quarter of this year.

The results? From the fourth quarter of last year through this year’s first quarter, total compensation for all private sector workers, the ECI increased by 1.42 percent, while labor productivity for non-farm businesses (the category most closely followed, and basically identical with the private sector) fell by 1.93 percent. That last number was labor productivity’s worst such performance since the third quarter of 1947. (As RealityChek regulars know, I focus on private sector workers because their pay levels largely reflect market forces, not politicians’ decisions, and consequently reveal more about the labor picture’s fundamentals.)  

The year-on-year statistics aren’t much better – if at all. Between the first quarter of last year and the first quarter of this year, the ECI for the private sector grew by 4.75 percent, but labor productivity dipped by 0.62 percent.

And since the U.S. economy began recovering from the first wave of the CCP Virus pandemic, during the third quarter of 2020, the private sector ECI is up by 6.61 percent, while labor productivity is down by 0.78 percent.

As also known by RealityChek readers, labor productivity isn’t the economy’s only measure of efficiency. Multifactor productivity is a broader, and therefore presumably more useful gauge. It’s not as easy to work with because its results only come out annually, and the latest only take the story up to the end of last year.

The picture is decidedly more encouraging – at least recently. From 2020-2021, multifactor productivity for non-farm businesses improved by 3.17 percent. But it still wasn’t good relatively speaking, since from the fourth quarter of 2020 through the fourth quarter of 2021, the private sector ECI increased by 4.38 percent.

Worse, from 2001 (when the Labor Department began the ECI) to last year, pay b that gauge was up 74 percent while non-farm business multifactor productivity had advanced by a mere 16.46 percent.  Therefore, clearly the recent pay and productivity numbers don’t simply stem from pandemic-related distortions of the economy. 

To repeat important points from last February’s post, the productivity lag doesn’t mean that U.S. workers overall don’t deserve nice-sized raises and better benefits, and it certainly doesn’t mean that they’re solely or largely to blame even for poor labor productivity growth. After all, managers are paid as handsomely as they are fundamentally to figure out how to make their employees more productive. Also, productivity is a barometer of economic performance that’s unusually difficult to determine precisely.

But the new figures do strengthen the case that labor costs bear significant responsibility for boosting inflation, and that a major fear surrounding overheated price increases – that inflation acquires powerful momentum as surging prices lead to big wage hike demands and vice versa, and create a spiralling effect that’s excuciatingly difficult to end without the Fed throwing the economy into recession. Just as depressingly, the new pay and productivity figures also strengthen the case that, unless the economy becomes a lot more productive very quickly, the sooner this harsh medicine is administered, the better for everyone in the long run.

(What’s Left of) Our Economy: A U.S. Productivity Report with Something for Everyone

24 Thursday Mar 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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Tags

CCP Virus, coronavirus, COVID 19, labor productivity, productivity, stay at home economy, technology, total factor productivity, Wuhan virus, {What's Left of) Our Economy

As known by RealityChek readers, I’m always hesitant to make too much of official U.S. productivity statistics because many economists believe that these various measures of efficiency are unusually hard to measure. (Google “productivity,” “data,” “measurement,” and “problems” and you’ll see what I mean.)

Moreover, I’ve been especially hesitant during the CCP Virus era, because the pandemic and related lockdowns and behavioral changes have been so unprecedented, and it’s still far from clear how lasting the effects will be.

Having said that, these data surely aren’t completely meaningless either, and a major finding of theirs has been so dramatic that it’s tough to dismiss: Both the relatively narrow measure of labor productivity, or the broader measure of total factor productivity show a big slowdown in productivity growth in recent decades.

For total factor productivity, here are the figures that compare the performance of non-farm businesses in percentage terms during the last three economic recoveries (i.e., using the best apples-to-apples data) before the CCP Virus-era bounceback that began in the third quarter of 2020:

1990s expansion (1991-2000): +10.34 percent

bubble decade expansion (02-07): +6.91 percent

post-Great Recession expansion (10-19): +4.88 percent

The main evidence for the slowdown is the fact that even though the latest expansion was the same length as that of the 1990s, its cumulative total factor productivity growth was less than half as strong.

In this context, it’s noteworthy today’s Labor Department release on total factor productivity (which, unlike labor productivity, tries to show business’ success in using a wide range of inputs – not just workers – to improve efficiency) has something for both optimists and pessimists.

Glass-half-full types will observe that, in 2021, total factor productivity grew by 3.17 percent – a record in a statistical series going back to 1987. The previous fastest annual pace was 1992’s 2.88 percent.

The glass-half-empty types, though, can argue that even this big advance won’t be enough to end the long-running slowdown. In the first place, the excellent 2020-21 impovement followed a 1.97 percent 2019-20 decrease that was the worst performance of all time. And in that vein, because solid total factor productivity increases are typical of early stages of an economic recovery, the 2021 year-on-year jump may only be a post-CCP Virus reversion to a dreary long-term mean.

The optimists can counter by claiming that pandemic-driven trends like severe labor shortages, consequently rising wages, and the advent of a work-at-home era in both the public and private sectors will push employers to invest more in labor-saving and communications technology in particular. The result will be a turning point in the recent crummy U.S. productivity story.

The only certainty I can see is that the virus is becoming endemic and that its economic growth-depressing effects will fade steadily (at least until the next pandemic). Other than that, I’ll simply say that the force of inertia alone indicates to me that the burden of proof for a durable productivity upswing – and for a needed U.S. transition from prosperity based on government stimulus to well-being with sturdier foundations – still lies with the optimists.

(What’s Left of) Our Economy: One Reason Wages May Indeed be Fueling U.S. Inflation

07 Monday Feb 2022

Posted by Alan Tonelson in (What's Left of) Our Economy

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business, consumer price index, ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, labor productivity, management, multifactor productivity, productivity, wages, workers, {What's Left of) Our Economy

As known by RealityChek regulars, I’ve pushed back strongly (e.g., here) against claims that today’s historically lofty levels of U.S. inflation have been driven largely or even significantly by wage costs. My main point: However healthy, if the wage increases American workers have gained recently lag behind the overall increase in prices across the entire economy – which has been the case – then how can they deserve much blame?

Even so, one other consideration needs to be added to the mix. It was mentioned by Federal Reserve Chair Jerome Powell in his press conference following the central bank’s announcement of its monetary policy decisions during the December meeting of its Open Market Committee (the partly rotating group of Fed governors that determines short-term interest rates and, more recently, the pace of bond buying or selling).

As Powell stated, the Fed is watching “the risks that persistent real wage growth in excess of productivity [growth] could put upward pressure on inflation.” That’s because when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.

Powell also said that “we don’t see that yet.” But in fact, if you compare one measure of employee pay that he’s been watching closely with the most current measure of productivity growth, that’s exactly what you’ll see – and been happening consistently for two decades.

The pay gauge in question is the Employment Cost Index (ECI) created by the Labor Department. What’s especially useful about it is that is takes into account not only wages and salaries, but the full range of benefits workers receive. This data series goes back to 2001, and if you (1) look at the total compensation figures for all private sector workers (as always, I leave out government workers because their pay is determined largely by politicians’ decisions, not market forces) in pre-inflation terms, then (2) place them side-by-side with the inflation results, and then (3), check these against the Labor Department’s labor productivity results, it’s clear that pay has been rising considerably faster than productivity.

For example, during largely high-inflation 2021, the employment cost index (which is measured quarterly) rose on an annual basis during all four quarters.Yet during the second, third, and fourth quarters of last year, labor productivity by the same yardstick improved more slowly than the ECI. In other words, worker pay was rising faster than productivity.

Nor are these results atypical. In fact, from the first quarter of 2001 through the fourth quarter of last year, the ECI is up 74.12 percent but labor productivity is up jus 47.62 percent.

Another way to look at the subject: Before the fourth quarter ECI and labor productivity results came out (on January 28 and February 3, respectively), I looked at the annual changes in both sets of data for the third quarters of each year going back to 2001. During those 21 third quarters, annual productivity growth lagged annual ECI growth in 15.

It’s important to note that these conclusions don’t automatically justify assuming that worker compensation increases are a major driver of today’s inflation after all, much less that productivity growth’s relatively slow advance is employees’ fault. After all, as just noted, labor productivity has been rising more sluggishly than the ECI for two decades. Inflation didn’t take off until last year. Moreover, the labor productivity number reflects far more than the amount of physical and/or mental effort workers put into their jobs. It’s also a function of how well business owners perform – e.g., in terms of giving their employees the equipment and training they need to do their jobs effectively, and of organizing their companies in ways that maximize performance.

In addition, labor productivity isn’t the only gauge of efficiency monitored by the Labor Department. Multifactor productivity (also known as total factor productivity) is tracked, too. This data series, as its name implies, tries to determine efficiency by examining all the inputs that go into corporate operations – including not just person hours worked, but capital, energy, materials, and all the services that are used to produce goods and, yes, other services.

I haven’t compared the trends in the ECI and multifactor productivity, though, for one big reason: Because it depends on collecting so much more information, the multifactor productivity results come out much more slowly than the labor productivity reports. And the 2021 figures don’t seem to be due out for several months.

Finally, as I’ve also noted (see, e.g., here), most economists believe that productivity is one of the most difficult features of the economic landscape to measure. So the wage and productivity comparisons should be viewed with some non-trivial amount of caution. 

Yet if worker compensation is indeed rising faster than productivity, that’s a story that’s unlikely to end well for the U.S. economy. Maybe those multifactor productivity figures – whenever the heck they’re released – will provide some much needed further clarity. 

 

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