Tuesday, January 17, 2012

Surging productivity and stagnant hiring

Productivity continues to grow at a rapid clip.  Today's WSJ takes a closer look at why.  Without even reading the article, students with a firm grasp of economics should suspect that either the cost of capital has fallen, the cost of labor has risen, or both. 

The answer is all of the above.  Capital costs have fallen because interest rates are nearly zero and companies could write off 100% of investments made in 2011.  Uncertainty about future labor costs (health care and taxes) makes employers averse to new hires.  As a result we see modestly rising output and it is coming from increasing output per worker rather than increased employment. 

Michael Mandel takes a deeper dive into the productivity issue in this article.  He points out that outsourcing is another important factor behind the increase in output per unit of input.  The reason is that we use value added, the difference between total revenue and labor and materials costs, as our measure of output.  When supply chain managers find cheaper sources of materials (or services), that increases margins and output with no change in labor or capital. 

Historically increases in productivity lead to higher standards of living; at least that was the case in the 20th century when society first shifted out of agriculture to manufacturing.  Now we are shifting out of manufacturing to services; hopefully the increase in living standards is just around the corner.

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