Turns out we were all less productive in the first quarter. According to the Labor Department, productivity fell 2.7% in the first three months of the year, even as output – everything we make in this economy – has increased over the same period. What matters here is how the Department of Labor defines productivity.
You may think you’ll be more productive if you do more stuff. But in this case, productivity is largely determined by how much you produce per hour.
If you work more hours? “You could make more, but it takes you even longer to get that incremental, additional output,” said Sarah House, senior economist at Wells Fargo. “And that means we’re less productive in this case.”
The Department of Labor isn’t trying to accuse your colleague of being lazy or anything – we’re talking about the economy as a whole. And overall more hours are worked because more people are working.
After all, the economy still creates many jobs. “Especially in some industries like leisure and hospitality, it’s been really difficult to attract and retain employees, and so you still see some hiring catching up in industries like this,” House said.
Meanwhile, production, which is the amount of things we produce, isn’t keeping up, said Menzie Chinn, an economics professor at the University of Wisconsin.
“Production had skyrocketed in the wake of the pandemic. So the growth rate of production, which is largely driven by demand, is decelerating sharply,” he said.
Production is also being held up because there are still many vacancies, according to Peter Orazem, a labor economist at Iowa State University.
“If you don’t have enough resources, if you don’t have enough input, it actually drains the productivity of the people who are working,” he said.
And that doesn’t bode well for the economy, said Harvard economics professor Jason Furman. “Productivity is probably the most important thing in business. It is the most important determinant of living standards over time.”
Furman added that we also want productivity to keep pace with wage growth. When wages rise and companies are more productive, they don’t have to raise prices as much because they make and sell more products.
“If instead wages are going up, but you don’t have productivity growth, then companies are going to want to pass all of that on in the form of inflation,” Furman said.
And that, he said, could make it harder for the economy to avoid a recession.
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