Despite the weakness in April’s payroll employment, the trend of hiring in the labor market has been strong. It certainly has been stronger than productivity. Over the past four quarters through Q1 of this year, real GDP rose 1.9%, with nonfarm business output up 2.2%. In the nonfarm business sector, hours worked rose 1.6% over this period while productivity increased just 0.6%.
There certainly has been a big increase in the output of articles discussing why the government’s bean counters may be having a hard time measuring beans in an economy that increasingly is services-based and knowledge-based. The articles aren’t counted in real GDP. Nor are free apps and websites that allow us to book flights, hotels, restaurants, and Uber cars. The Cloud undoubtedly has increased the productivity of technology hardware, software, and geeks, but how can that be measured? Amazon has increased the productivity of consumers’ shopping experiences, but is that even a valid economic concept that should somehow be included in the official productivity stats? How can we measure the output and productivity of finance and health care industries?
We have lots of questions along these lines but few solid answers. A couple more concrete examples of the productivity puzzle can be had by dividing real core retail sales by retail payrolls and dividing real construction put in place by construction payrolls. The retail productivity proxy has been relatively flat over the past few years. Of course, to avoid counting output multiple times, it is the value added to the goods sold that should be reflected in the productivity of retailing. That must be getting harder to measure in the Age of Amazon. The construction productivity proxy has been as cyclical as construction and completely trendless since the mid-1960s. It’s not surprising to see that there has been no long-term growth in productivity in the construction sector.
In the health care sector, we can measure productivity by dividing real personal consumption expenditures on medical goods and services by payrolls in the sectors. It’s been hovering at a record high over the past year, and is up 23% over the past 20 years. However, that’s only 1.2% per year on average. Then again, is spending on health care a good measure of the output of health care? Should productivity in health care reflect its impact on all workers’ productivity and longevity? As we noted above, we have questions, not answers.
Why do we even care about productivity? From a supply-side perspective, it determines the standard of living. There are other measures of the standard of living that confirm that it has been increasing at a reasonable clip and that Americans have never been better off. In recent months, we’ve examined real personal income per household and real consumption per household. Today, we noted that real hourly compensation is doing very well. We should add that real average hourly earnings for all workers (data starting March 2006) rose 1.5% y/y through March to a record high, and is up 27% over the past 20 years for all production and nonsupervisory workers. Contrary to the urban legend, real wages haven’t been stagnating for the past couple of decades.
Admittedly, there are plenty of angry voters who don’t believe that they are better off today than in the past. However, the data suggest that the problem isn’t as pervasive as suggested by populist politicians and the media coverage of this issue.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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