The Bureau of Labor Statistics released new data on labor productivity today. During the first quarter of 2016, labor productivity fell 0.5 percent, making the first quarter the third quarter in a row for falling productivity. Prior to the first quarter of this year, labor productivity had not fallen three quarters in a row since 1979 in the lead up to the 1980 recession and the 1981-82 recession.
The only other period with such a long period of declining productivity can be found in 1973 and 1974 in the midst of the 1973-75 recession following the Nixon shock:
As with any government statistic, this one should be approached with caution, but it’s likely not a coincidence that we see poor productivity data in this time series during periods of known economic weakness.
We’ve already seen in recent days how the current “recovery” is weak and how young workers are staying out of the work force — thus laying the ground work for more stagnant productivity later.
So who can be shocked that the current productivity numbers are some of the worst we’ve seen since the 1970s?
A decline in worker productivity is troublesome for an economy because wages are connected to worker productivity, as is economic growth.
As we’ve noted multiple times in the pages of mises.org, if we want to raise wages, the key lies in increasing worker productivity. (See here, here, and here.) Simply decreeing an increase in the minimum wage, for example, will only benefit a select few because only an increase in worker productivity can actually create the conditions that will lead to more wealth being created by workers in general — which translates into higher wages.
Moreover, savings and investment are reinforced by increases in labor productivity. That is, if workers become more productive, they produce more wealth, and this in turn leads to greater availability of resources for saving and investment. And so on.
On the flip side, a society that focuses on consumption at the expense of saving and investment will see a decline in worker productivity as capital ages and becomes less efficient. A consumption-based society, rather than invest in expensive machine tools and training will spend its resources on consumption goods instead. This will lead to fewer loanable funds being available, and less investment in businesses.
Thus, it is likely not a coincidence that business investment shows signs of weakening. The Wall Street Journal reports:
Business investment has been a notable sore spot for the economy in recent months. A closely watched measure of business spending, fixed nonresidential investment, has declined for the past three quarters according to Commerce Department data. A proxy for spending on new equipment, new orders for nondefense capital goods excluding aircraft, has declined on a year-over-year basis almost continuously for the past year and a half.
If current trends continue, this will spell trouble for real wages in the future, and it will also exacerbate the effects of recent minimum wage increases. We know that, ceteris paribus, minimum wage increases lead to greater unemployment, but these effects have often been diminished by ongoing increases in worker productivity. In other words, real worker output has been brought up to minimum-wage levels by gains in productivity, thus somewhat negating the negative effects of the minimum wage. With weaker productivity gains, the negative effects of minimum wage laws will last longer.
Naturally, the solution to any worker productivity problem is not on the table for policymakers: reducing regulations that hobble businesses while employing a more sane monetary policy that encourages saving rather than endless consumption.
This article was initially published on Mises.org.
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