Thursday, September 23, 2010

The productivity mystery in the Great Recession

Aggregate output has been rising since June 2009, yet employment has dropped by 329,000 over the same period (July 2009 through August 2010).  The only way to increase output with fewer workers is to raise productivity.  There are now some signs, according to WSJ, that businesses have done all that they can do on the productivity front and that any future increases in output will have to be generated through increased hiring. 

Usually increased productivity growth is viewed in a positive light, as the key to increased standards of living over the long run.  Rapid productivity growth is most often associated with technological change, capital-labor substitution or increases in human capital (e.g., better trained or educated workers).  Over the last two years there is some reason to believe that none of these factors has been at work; instead as fears of joblessness escalate companies have been able to "squeeze their work forces," as the article mentions.  The good news for workers: as the economy recovers there will be more hiring opportunities and the squeeze will be over.

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