Posted by: Josh Lehner | May 12, 2022

The Economy Could Use Better Productivity

With a structurally tight labor market making it challenging to find workers, and higher wages potentially making it cost prohibitive to hire them if you can find them, what are firms to do? The productive capacity of the economy is the combination of capital and labor it takes to make goods and services. If labor proves more challenging, firms can increase their capital and investment.

Higher productivity would solve multiple economic issues at the same time. It would increase production, alleviating some supply constraints in the economy. It would allow businesses to better afford higher wages and keep unit labor costs lower as a result. Both would be disinflationary relative to the current environment.

To date, productivity in the economy is not much higher than its pre-pandemic trend. Productivity increased initially, in part because firms were forced to make do. Sales were strong but the workforce was smaller. However, as employment has increased in the past year, per worker productivity has largely moved sideways, eroding some of those initial gains. Productivity in the first quarter of this year declined, although the data is noisy and omicron disrupted workplaces to a greater degree.

Moving forward, productivity remains a key, long-run economic measure. Higher productivity would raise the speed limit of overall economic growth, and better keep inflation at bay. There are two potential bright spots that could point toward faster productivity in the years ahead.

One, new orders for capital goods remain strong. Businesses are looking to investment in new equipment. This should make workers more productive. However, the massive increases in new orders, measured in dollars, do not look as strong on an inflation-adjusted basis. The good news is even inflation-adjusted new orders remain above pre-pandemic levels. This is at least in part due to strong sales and manufacturing production overall, but could lead to better productivity moving forward.

Two, new business formation remains strong. New firms are usually best able to bring new products, services, and efficiencies to the market. Should this new generation of businesses do likewise, productivity could improve in the years ahead, even as the creative destruction process results in a few more business closures along the way. To date the number of businesses in Oregon is higher than it was pre-pandemic. Closures are up, particularly in hard-hit industries like leisure and hospitality, but new firms are beginning to take their place.

For more on start-ups in Oregon see here, and for more on the types of capital and productivity in Oregon see our office’s previous work.


Responses

  1. Supposedly, nationally, we had a -1.5% (+/-) drop in productivity. Since it’s measured in terms of unit/hour, what changed?

  2. Forgot, in Q1-2022 the drop occured.


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