Monday, November 29, 2010

Output and Profits Per Worker Are at Record Highs; Bad News: That Means a Jobless Recovery Ahead

The chart above shows quarterly increases in worker productivity, using output per hour from the BLS for the nonfarm business sector.  The shaded areas highlight the one-year periods following the end of the last three recessions (1990-1991, 2001, and 2007-2009), and show the huge surges in productivity in the early stages of the subsequent expansions - as companies learn how to "do more with less."  Notice that the productivity surge was greater following the 2001 recession than the 1990-1991 recession, and now the most recent productivity surge characterized by two consecutive quarters of gains above 6% (2009:Q3 and 2010:Q1) is much greater than the 2002 period.  It's partly those productivity surges that translate into "jobless recoveries," and this time will be no different, and might actually be longer than the post-recession periods of weak job recovery following the last two recessions.  

What motivated this post was a story in the Washington Post last Friday titled "Rising worker productivity, innovation boosts profits but may lessen hiring need," and here are a few key points:

"Companies slashed 8.5 million jobs during the worst recession since the Great Depression while also slowing capital investment plans. Campbell, the world's largest soup maker; DuPont, the country's third-biggest chemical maker; and United Parcel Service, the world's largest package-delivery business, are asking workers to help save cash by working smarter with existing technology. A potential cost: Efficiency gains reduce the chances that recession-casualty jobs will come back. 

"When the productivity growth comes, then watch out because that is when companies start not needing so much labor," Edmund Phelps, a Columbia University economist and Nobel laureate, said in an interview. Phelps says productivity growth works in long waves. In boom times, companies stock up on equipment. In lean times, they find ways to maximize performance of that equipment.

Growth in productivity, or output produced in an hour of work, averaged an annualized 3.4 percent in the five quarters since the 18-month recession ended in June 2009. That is similar to the 3.7 percent gain in the first five quarters after the 2001-03 so-called jobless recovery. The efficiency gains have paid off in corporate profits. Earnings from continuing operations of companies in the S&P 500 have rebounded 23 percent since the fourth quarter of 2007. Sales have declined 9 percent over the same period."

Bottom Line: The good economic news is that the productivity of American workers has never been higher, and the recent huge productivity gains have translated into record-high profits for U.S. companies, measured both in the absolute dollar amount of after-tax profits, and also measured in real dollars of after-tax corporate profits per private-sector worker, which is at an all-time high of $11,312 and above the 2008 cyclical low of $7,000 by more than 60% (see bottom chart above).  The bad economic news is that we might be in for several years of anemic job growth and a "jobless recovery," as a result of companies being able to expand output and increase profits without increases in employment. 


At 11/29/2010 3:53 PM, Blogger Buddy R Pacifico said...

Question: Are contract workers listed as employees?

I have a family member, who today, begins employee status instead of contract worker at the same firm.

If he was not listed as a worker previously then U.S. corporate employment went up by one today. This kid was upgraded in status for consistent high productivity.

At 11/29/2010 7:09 PM, Blogger PeakTrader said...

"Output and Profits Per Worker Are at Record Highs; Bad News: That Means a Jobless Recovery Ahead"

If productivity is near the maximum and demand picks-up, firms will have to hire, or new firms will take up the slack.

We may be finally there, although it may be a slow recovery.

At 11/29/2010 7:16 PM, Blogger Jason said...

There cannot be a jobless recovery with Obama in office. That's a Bush problem.

At 11/29/2010 7:29 PM, Blogger PeakTrader said...

Jason, Obama has proved he can accomplish a recoverless recovery.

At 11/29/2010 8:51 PM, Blogger Hydra said...

High productivity causes unemployment, yet the problem with taxes is that they reduce productivity. Great. Lets have lots of low productivity jobs. More government employees and higher taxes.

At 11/30/2010 8:19 AM, Blogger James Fraasch said...

What do you say to economists like Laffer who insist that the recent corporate profits and GDP growth has been due in large part to the acceleration of profits into 2010 to avoid the uncertainty of taxes in 2011?

I give some credence to that line of thinking. But the average Joe does not have the ability to accelerate earnings. He just earns a paycheck every two weeks.

Corporations, on the other hand, have the ability to account however they like.


At 11/30/2010 8:25 AM, Blogger Bill said...

But what has not followed the higher corporate profits & worker productivity is an increase in wages for the workers. If their "working smarter" with technology at hand increased profitability than shouldn't they be rewarded for that?

At 11/30/2010 9:13 AM, Anonymous Anonymous said...

"If their "working smarter" with technology at hand increased profitability than shouldn't they be rewarded for that?"

Bill, we kind of are rewarded, but it's difficult to measure the reward the way we're used to by measuring compensation increases. Instead of compensation increases, now we get to keep our job in an increasingly competitive worldwide labor market. So, is the cup half full or half empty?

At 11/30/2010 10:03 AM, Blogger Jet Beagle said...

James Fraasch,

Can large corporations accelerate profits to any great degree and not run afoul of accounting standards? In the post-SOX world, I'm not sure CEO's and CFO's are as eager to use accounting tricks as they once may have been.

At 11/30/2010 10:05 AM, Blogger Jet Beagle said...

Walt G,

Any time that worker productivity increases, it is a net gain for all consumers. As I see it, the glass is full full.

At 11/30/2010 10:11 AM, Blogger Jet Beagle said...


High productivity does not cause unemployment. High unemployment is caused by minimum wage laws, extended unemployment compensation, health insurance mandates, high taxes on employers, and other market-interfering disincentives to employment and wage adjustments.

At 11/30/2010 10:21 AM, Blogger Jet Beagle said...

Bill: "If their "working smarter" with technology at hand increased profitability than shouldn't they be rewarded for that?"

I think economic theory does teach that increased worker productivity will cause employers to bid up the wages for a scarce resource - workers - until profits have returned to "normal" levels. But I also think classic economic theory simplifies the world with such caveats as "all else equal". The problem is that government disincentives - for example, health care mandates, higher unemployment taxes, employment regulations that drive up the cost of hiring - make it riskier than ever for employers to hire.

Also, I'm not so sure the global pool of labor is as scarce as implied by classic economic theory.

One thing I'm not clear on - and I'd appreciate some insight from real economists - is why returns driven by capital investment should ever flow to workers rather than to owners of capital.

At 11/30/2010 12:39 PM, Blogger Benjamin Cole said...

Unit labor costs are going dpown--nearly at a 2 percent a year rate. Hard to see inflation with such figures cooked into product pricing....

At 11/30/2010 2:17 PM, Anonymous Anonymous said...


The percentage of labor in the cost of the product is dropping, too. Accordingly, labor is less of a concern now when determining pricing and should impact inflation less.

Some manufacturing that used to be 50% or more of the cost of the product is now 15% or even in single-digit percentages. It's easy to see this progress if you watch a new manufacturing process and compare it to the old process.

Of course, some people do not see this as progress if they don't have a job because they were left behind when times changed and they did not.

At 11/30/2010 3:15 PM, Anonymous Anonymous said...

Just once when Obama keeps blaming Bush for the current economy, I wish a reporter would ask him if Clinton was to blame for the bust, since the market peaked in April 2000 during his term. The only good news is that the last time we had such a stuffed shirt in office, Carter, Reagan then got elected. Hopefully Daniels or Christie or someone new can do the same in 2012. Instead, Hydra and his ilk want to take from the productive to hire govt workers to dig ditches and fill them up again.

Jet, I disagree with your tactic of denying that high productivity causes unemployment, of course it does. But it does so by giving us all cheaper goods, so it's worth the loss, as opposed to the waste from the other reasons for unemployment that you mention, and we always find new work for those people to do eventually. I think you answered your own question as to why "labor" isn't getting the gains from higher profits right now, because they're largely not that skilled and fairly easily replaceable. There are highly skilled workers who are making a ton of money right now, it's just that that's still a small pool at the moment. But rising gains to the top only incentivize everybody else to try harder and eventually that dam breaks and everybody else partakes. For example, one Katie Couric making $15 million a year and Brian Williams making $10 million a year will soon be replaced by a 100 online news anchors, each making $150k/year. Do the math and you see that not only is it much cheaper for the viewer but obviously that will be a big hit to "income inequality." Why hasn't it happened already? It takes time to get all the technology pieces in place, like Google TV for easy access to internet shows on your TV but the outcome is inevitable, only a question of when. ;)

At 11/30/2010 5:42 PM, Blogger Jet Beagle said...


Perhaps I wasn't clear in my response. I agree that technological changes can cause short term displacement of workers. But unemployment of more than a few months is a different matter. All workers have employable skills. It's just that the skills may not be worth a whole lot of money - perhaps not even $7.00 an hour.

I'd be happy to hire unemployeed workers to wash the windows of my home - if the rate they charged me were low enough. I'll bet most of the people on my block would hire them as well. So why aren't unemployed workers knocking on the doors of our neighborhood offerring to wash our windows? My guess is that they wouldn't work for the amount I'm willing to pay. After all, they can collect unemployment benefits and other assistance for a long time before they will starve.

What I think really hurts the unemployed is the attitude among so many that they are victims. They're not victims. The choices they have made and the choices they continue to make are what cause them to be unemployed.

At 12/01/2010 9:19 AM, Blogger James Fraasch said...


Absolutely! The banks do the extend and pretend ALL THE TIME. They certainly have the ability to manage profits to the same degree.

In B school the running joke became about Coke. How is it that any company can meet analyst expectations quarter after quarter year after year and never miss by more than a penny either way.

Analysts never got all the other companies within a penny quarter after quarter, but Coke was known for never disappointing.

So yes, earnings can absolutely be managed quarter to quarter, year to year.

At 12/01/2010 10:42 AM, Blogger Jet Beagle said...

James Fraasch,

I agree that a small amount of profits can be accelerated. But CEO's and CFO's now risk criminal prosecution if their financial statements are intentionally misleading. I'm just not sure CEO's and CFO's are willing "manage their earnings" enough to make a blip in national profits per worker. That's the level we were discussing earlier.


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