Thursday, May 3, 2007

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Housing and the productivity slowdown

Labor productivity growth in the United States has declined every year since 2002. In the first quarter of this year it fell below the symbolic 2% barrier, evoking bad memories of the stagflation-era economy.

Over at Capital Commerce, James Pethokoukis argues that the slowdown should not be a cause for concern:

[M]any economists were concerned when productivity came in at just 1.6 percent last year. Was America returning to its old low-productivity ways? If so, that was a much bigger problem than the housing slowdown. But it looks like the housing slowdown itself has been making strong productivity look bad. Here is what the econ team at Goldman Sachs recently said on the topic:
"We believe there is a straightforward explanation for slower productivity growth—the housing downturn. The sharp drop in homebuilding activity has not yet led to a significant decline in employment, so productivity in this sector is falling rapidly. Productivity growth in the rest of the nonfarm sector remains at a healthy 2.5 percent pace. Housing productivity should begin to improve within the year. Two factors—seasonal hiring patterns and the lag between the slowdown in home sales and the slowdown in home construction—have delayed the employment adjustment, but we expect declining residential housing employment to pull nonfarm payroll growth below 100,000 jobs per month in the spring and early summer."
Dale Jorgensen, productivity guru and Harvard economics professor, told me a similar story in a chat today.
This seems like a peculiar inverse of what was happening in the economy circa 2002-3 -- astounding productivity gains that were not matched by wage or employment growth. One wonders if this means that, for the next year, the U.S. economy will observe the obverse of marginal productivity increases but robust wage and employment growth. Profit margins have been sufficiently high to allow this to happen -- though I confess I fail to see why firms would have an economic incentive to act in this fashion.


posted by Dan on 05.03.07 at 09:03 AM


On my daily run. I saw construction workers (high probability illegals) literally carrying buckets of dirt up a hill while preparing a homesite. In other words, they were grading the site (admittedly on a steep and hemmed in lot) by hand, with techniques used since the days of Moses and Pharoh . When you can get an abundance of cheap labor, it doesn't pay to rent equipment such as a Bobcat. That's hell on productivity.

The workers, and there were about twelve on the site, didn't even bother to form a bucket brigade, which would have helped a bit. The guys were each trudging individual buckets up the hill.
Sure this is an anecdote, but I think it reflect reality more than a lot of the stats out there.

posted by: Mitchell Young on 05.03.07 at 09:03 AM [permalink]

If we are lucky, otherwise we could end up with a recession.

posted by: Lord on 05.03.07 at 09:03 AM [permalink]

There is pretty much no chance of this somehow leading to the obverse. Wages will continue to stagnate except for those at the very top until either unions revive or the Federal government forces companies to raise wages. Beyond the minimum wage increase, I don't see a lot of likelihood of either.

posted by: John Biles on 05.03.07 at 09:03 AM [permalink]

Labor productivity in the United States has declined every year since 2002.

Good Lord! Certainly one hopes you mean "the rate of labor productivity growth in the United States has declined every year since 2002," instead.

posted by: John Thacker on 05.03.07 at 09:03 AM [permalink]

I confess I fail to see why firms would have an economic incentive to act in this fashion.

Then they won't. Why pretend they will? Simply so you don't have to worry about the fate of workers?

posted by: Cryptic Ned on 05.03.07 at 09:03 AM [permalink]

Many states have been taking a proactive stance towards raising wages. In the states where I live (college student), both have recently passed new minimum wage laws. Both have drastically increased the min. wage. This seems to be artificially increasing wages, rather than allowing the market to account for it. The state governments have stepped in and adjusted the min. wage. I think that this will not allow wages to increase much more than what has been mandated.

posted by: Kyle Hummel on 05.03.07 at 09:03 AM [permalink]

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