February 4, 2021
Non-farm productivity declined 4.8% in the fourth quarter after having climbed by 5.1% in the third quarter after having surged by 10.6% in the second quarter. The second and third quarter increases are huge. The fourth quarter run-up consisted of a 5.3% increase in output combined with a 10.7% increase in hours worked. Hence, a 4.8% decline in productivity in that quarter. In the past 10 years productivity has grown by 1.2%. In the past year it has risen by 2.5%,
We do not want to get too carried away with this, but technology has been playing an increasingly important role in our economy. It certainly helped to get us out the recession quickly, and our view is that it will help businesses adjust to the new economy as it evolves.
In the past two quarters hours worked has fallen much more rapidly than output. Hence, the gains in productivity. Could it be that when the dust settles we are going to find that we perhaps did not need all those workers in the first place?
If because of technological advancements productivity can rise by, say, 2.0% annually, then our economic speed limit has picked up from 1.8% a few years ago to perhaps 2.4% (consisting of 0.4% growth in the labor force plus 2.0% growth in productivity. That is an important concept because it is basically the growth rate in our standard living. The difference between 2.4% growth in our standard of living and 1.8% is huge — a 25% faster rate of growth rate in our standard of living. We will see how this develops, but it is an important piece to consider.