Americans sure worked hard last quarter. Productivity grew at a 9.5 percent annual rate, the Labor Department reported today. Labor productivity is measured by dividing output by hours worked, and in the third quarter, output rose by 4 percent and the number of hours worked fell by 5 percent. Employers have cut payrolls and slashed hours throughout the recession, while keeping up production.
Higher productivity is generally a good thing, but it makes people nervous in a recession. If employers discover they can do more with fewer workers, then what's their incentive to hire again? The AP published a story this morning noting that the productivity gains could be bad news for job seekers.
But economist and Nobel laureate Gary Becker covered this topic in September on the Becker-Posner blog, and his insights are encouraging. First, Becker explains that this kind of report would not be unusual: "Unemployment is typically a lagging indicator in the sense that it usually begins to fall only months after output has started to increase again." Becker expected output to rise in the third quarter—although "only a little"—and so expected unemployment to trend upward for a while. Here's the key point: "However, if, as I expect, the growth in productivity will continue into the future at a good pace because of the many innovations and inventions coming on line, that will lead to greater, not a lesser, growth in employment," Becker writes. "For at some point, the economics of the positive relation between productivity and employment becomes more powerful than the short-term arithmetic negative relation that occurs during recessions."
In the meantime, the road will be rocky. Congress is extending unemployment benefits again. But most of the unemployed aren't collecting benefits and one third of the unemployed have been unemployed for six months or more.