Nonfarm Productivity Revised Down

Nonfarm business productivity in the second quarter of 2011 was revised down from -0.3% to -0.7% last week. The Bureau of Labor Statistics number is the worst slide in productivity since the end of 2008—which was a pretty bad time in the economy if I recall. This is not a good trend since productivity and quality of life are interconnected. Here’s the chart:

Nonfarm productivity

This downward trend is another indication that recovery from this contraction is not going to look like previous recoveries. We won’t get the same jobs back—nor should we want them. Innovation is less productivity oriented and more geared towards efficiencies and automation. Recovery is going to require retraining, fixing the education system, removing regulations and occupational licensing barriers to entrepreneurship, not to mention entitlement reform and a tax code overhaul.

Tyler Cowen articulated further a few weeks ago (commenting on the numbers when they first came out) some of the deeper meanings behind these numbers:

These [poor productivity numbers] have helped to keep the labor market sluggish and have thwarted a potential recovery.

Yet these numbers don’t capture the entire issue, and are themselves plagued by an array of problems. One bias in the economic statistics — which never shows up in published revisions — is embedded in the health care sector, where third-party payments, subsidies and care quality are hard to monitor and measure. A result is that a dollar spent on health care does not necessarily mean a true dollar’s worth of value added. The United States spends more per capita on health care than any other country, yet without producing measurably superior results. To the extent that some of these expenditures are wasteful, the gross domestic product and productivity numbers overstate economic growth.

Here’s another problem: Expenditures on the military and domestic security have risen since 9/11, but those investments are intended to neutralize external threats. Even if you agree with this spending, it generally doesn’t produce useful goods and services that raise our standard of living.

One of the most commonly cited productivity numbers describes per-hour labor productivity, but this, too, has intrinsic flaws. Labor force participation has been falling for more than a decade, and low-skilled workers are leaving the work force in disproportionate numbers. Taking some lower-paying jobs out of the mix will raise the measure for average productivity, which is hardly the same as increasing the economic gains from a given set of workers or, for that matter, from putting more people to work by making them more productive.

It is increasingly clear that many of our current economic problems predate the financial crisis, even if the crisis accelerated them or brought them into clearer view. A recent study by E. J. Reedy and Robert E. Litan, both researchers at the Kauffman Foundation, found that sluggish job creation was a long-term trend. For instance, job creation from start-ups has fallen every decade since the 1980s, raising the specter of an America with an innovation shortfall.

In short, the employment problem is even worse than these productivity numbers would let on. See the whole Cowen piece in the NYT here.