Friday, August 23, 2013

Economic Growth vs. Employment Growth

In March 2012, I posted a discussion of the strength of economic growth relative to employment growth, putting the recent inconsistency in historical context.  Given the recent revisions to economic growth, I decided to update the analysis to see if anything has changed.  Rather than compare economic growth to employment growth, due to the changing mix of employment (increasing proportion of part-time jobs), it's constructive to see how overall output per hour of work (productivity) has behaved over time.  For the overall economy, output is estimated by real GDP while hours worked is estimated using the index of aggregate hours worked index from the monthly labor market report.  The following chart displays the behavior of productivity over the last 50 years:


You'll note that, after surging at the end of the recession/early in the recovery in 2009, productivity has stagnated in recent years.  In fact, from the beginning of 2011 to the end of the second quarter of 2013, productivity growth has averaged -0.3% (reaching a record low of -1.1% in the summer of 2011). Historically, the only time productivity growth tends to be negative is right before or during a recession.  The optimists will point out the one exception: 1993-1995, which preceded the boom of the late 1990s.

From an economic point of view, it's hard to be excited about an economy that is growing at a modest pace accompanied by stagnant productivity.  Historically, there's been a strong correlation between productivity and compensation (income plus fringe benefits earned by workers) as illustrated by the chart below (blue line is productivity and red line is compensation):


The poor performance of productivity in recent years suggests that one shouldn't expect significant improvements in average compensation (and thus the standard of living) in the near future.