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Another Bad Sign: Productivity Falls by .9 Percent

1:06 PM, Jun 8, 2012 • By IKE BRANNON
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The federal Bureau of Labor Statistics announced that worker productivity fell by .9 percent in the first quarter of 2012. Some press and Obama sympathizers have blithely spun this as a good thing for the economy, making the rote observation that less productive workers mean that companies have "wrung all the productivity out of their current workforce" and will thus need to hire more workers soon.  Nothing could be further from the truth, and its decline is a harbinger of worse economic news down the pike.

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Productivity measures how much the typical employee produces in an hour of work. Ultimately this is the key determinant of our standard of living: The only other way to get more goods and services in the economy is for more people to work or for people who already have jobs to work more. At this point both are desirable, but there are limits to both.

However, in the short run measuring productivity is tricky, because we do not measure hours worked very well. While some people punch a time clock and can accurately report how many hours they worked last week, most people no longer have such jobs: If the BLS surveys them, they will likely spend a few seconds contemplating the previous week and then make a good-faith guestimate, with a few hours added to make them look industrious.

Here's the issue this creates: When the economy begins to slow, companies respond to a decreased demand for their services by first reducing hours worked. The problem—at least for the BLS—is that since they don't measure hours very well they tend to overstate declines in productivity. As a result, a situation where companies cut back production and hours each by five percent may show up as having (accurately) reduced output by five percent but reducing reported hours worked by only two percent. As a result it looks like the average worker somehow became less productive.

Here's a tidbit to remember: Absent some sort of gigantic disaster befalling our country, actual productivity never falls. When it is reported to have fallen—as it was yesterday—what it means is that the economy is slowing down and companies have just begun responding by cutting back hours. If the slack demand persists, companies will start cutting workers instead of hours, and that is when the economy's in real trouble.  These productivity number simply tells us we're going the wrong way—which is obvious to anyone who's not spinning for a living. 

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