Using Productivity Data to Understand Employment Trends

A slowdown in productivity growth is not usually good news, but the dip in U.S. productivity in the second quarter of 2010 may have a silver lining. The 0.9 percent decline in productivity, and the data that underlie it, appear to indicate that the stage is now set for employment growth in the second half of the year.

Any improvement in the employment picture would be welcome. Although output has grown steadily since the apparent end of the recession in mid-2009, the unemployment rate, which remained stuck at 9.5 percent in July 2010, is only slightly below its peak. Some observers are describing this as a "jobless recovery."

Very strong growth of labor productivity is what has made the "jobless recovery" possible. Output per labor hour usually grows at about 2.5 percent per year, but in the early stages of the recovery, the annualized quarterly rate of productivity growth has surged to as high as 8 percent. Its decline in Q2 2010 was the first since 2008, indicating that employers are running out of ways to squeeze more output from the existing workforce.

Further evidence is found in the fact that hours per worker, which have climbed steadily during the early stages of recovery, are now above their pre-recession average level. If output continues to grow, employers are likely to need to hire additional workers, not just expand hours further.

In making any hiring decisions, employers will keep an eye on unit labor costs--labor costs adjusted both for changes in compensation and in productivity. Productivity fell by 0.9 percent in Q2, but compensation fell almost as much, 0.7 percent, so unit labor costs were essentially flat.

On balance, then, labor market data show an abundant supply of reasonably priced, productive labor, and an exhaustion of reserves produced by recession-driven labor hoarding. The groundwork is laid for employment growth to improve later this year if--and it is still a big if--there is sufficient demand for the output that newly hired workers can produce.

Follow this link to download a free set of classroom-ready slides including charts of the latest labor market data and a discussion of their interpretation.