Tag Archives: productivity

Employment in the Recession: The Problem is Slow GDP Growth, Not Productivity

Posted on by

I.  Introduction

The recovery in employment has been exceedingly weak in the on-going, but slow, recovery from the 2008 collapse.  The recovery of GDP has been weak as aggregate demand has simply not been there to absorb increased production.  Household consumption has been weak following the collapse of the housing bubble, and monetary policy has been pushed to the limit with Fed interest rates now almost zero but the economy still in a liquidity trap.

The one instrument that could have been used to create demand for output and hence employment would have been increased fiscal expenditures.  But as noted in a March 3 posting on this blog, total government spending (including that from state and local governments) has been flat or falling since Obama was inaugurated.  Indeed, that blog found that if fiscal expenditure had been allowed to grow as fast as it had in the Reagan years following the downturn that began in July 1981, GDP at the end of 2011 would have been close to full employment output.

The oft repeated Republican alternative view, however, is that the slow recovery in GDP and jobs has been due to overbearing new regulations, and not due to fiscal drag or some other demand side issue.  Indeed, Republicans have argued strongly that government expenditures should be cut even further.  They have asserted that the recovery in jobs has been weak due to expensive and excessive new regulations instituted by the Obama administration, which have deterred businesses from creating jobs.  While more than a bit confused, as we will see below, the argument is that these new regulations have hurt productivity, so businessmen could not profitably employ new workers and hence did not hire new workers.

A convenient summary of this view appeared today in the Washington Post, in the “Right Turn” column of the conservative columnist/blogger Jennifer Rubin (link here to the on-line version).  She wrote:  “Get Obama out of the way — and with him Obamacare, the Dodd-Frank legislation, a chunk of discretionary spending and the planned tax hikes — and instead put in place his agenda — tax cuts, entitlement reform, reduced regulation, and domestic energy development — and the economy will take off.”  The argument falls apart if these measures, and the rest of what has been done during Obama’s period in office, did not result in a collapse in productivity.

This blog will look at whether there is any factual support for this Republican alternative view on the cause of the slow recovery in employment.  Did productivity go down after Obama took office?  What path has productivity taken over the course of this downturn, and how does this compare to the paths taken in previous downturns?  And in reviewing this, we will examine the confusion in this argument on the links between productivity and job growth.

II.  GDP and Employment Growth in the Downturns

To start, it is helpful to see what the paths of GDP and employment have been in this downturn, and in comparison to previous downturns.  The path of real GDP was shown in the March 3 blog cited above, and is repeated here for convenience:

As was noted before, the path of GDP recovery has been especially slow following the 2008 financial collapse.  GDP fell sharply in the first five quarters of the downturn, in the last year of the Bush presidency and into the quarter that Obama was inaugurated (the first quarter of 2009).  GDP stabilized soon after Obama took office and then started to grow, but has since grown only slowly.  The recovery has been the weakest of any among the six recessions in the US of the last four decades.  The earlier blog noted that this can be explained by weak demand for output, due to government spending that has been flat or falling since Obama took office, and exacerbated by the collapse of the housing market.

With the weak growth of GDP, it should not be surprising that employment growth in this weak recovery has been exceptionally weak as well:

Employment fell sharply in the year before Obama took office, more than in any of the other downturns of the last forty years.  And then, despite the stabilization of GDP, employment continued to fall through 2009 before stabilizing.  But the recovery in employment since then has been poor.  This employment path has been by far the weakest of any of the six downturns of the last forty years.

III.  Labor Productivity in the Downturns

Can this weak recovery in employment in the current downturn be explained by poor productivity growth (a result of excessive regulation), as the Republican argument asserts? Has the path of labor productivity also been an outlier in the current downturn?

Actually, the path of labor productivity has been well within the paths seen in the other downturns:

Labor productivity did in fact fall at first, during the last year of the Bush presidency, although this was not uncommon among the downturns.  The fall while Bush was still president was relatively high, but similar to the downturns seen after November 1973 (Nixon/Ford) and July 1981 (Reagan).

But it is interesting to note that labor productivity began to rise quite rapidly immediately after Obama took office.  I would not argue that this was entirely due to Obama, especially in the first few months of his term.  I am merely pointing out that there is no basis for the assertion that Obama instigated regulations hurt productivity and hence job growth (under the Republican argument) after he took office.

This becomes even more clear if one re-bases the series so that labor productivity in the fifth quarter after the start of a downturn is set equal to 100:

Starting from when Obama took office (in the fifth quarter after the start of the downturn), labor productivity growth has been high, and indeed grew at about the same rate as that seen following the 1981 downturn (during the Reagan presidency).  Productivity growth during these two recoveries were not only similar but also the most rapid by a significant margin among the six downturns tracked.  The main difference between the two is that productivity growth has slowed in the current cycle over roughly the last year (i.e. starting in quarter 13), while it continued to grow at that point in the recovery from the downturn that began in July 1981.  But the difference is not large, and one should not draw strong conclusions from it.

It is a firmly held position in Republican dogma that the “reforms” instituted by Reagan of deregulation, cuts in taxes, undermining of labor unions, and other such measures, led to a miracle of productivity growth from which the economy still benefits.  I noted in an earlier posting (see here) that productivity and output growth in the US was in fact slower in the 30 years following Reagan than in the 30 years before.  Over a long term perspective, Reagan was not such a miracle.  And from the diagram above, we see that over the short term, starting from the same point in the business cycle (five quarters after the peak), the record in terms of productivity growth for the vilified Obama is basically the same as for the sanctified Reagan.

It is not a coincidence that the employment picture finally started to improve in 2011, precisely when productivity growth, which had been strong, started to level off.  And this points to the basic confusion in the Republican argument, which some of you may have already seen.  By basic arithmetic, the number of employees one needs to produce a given amount of output depends on productivity, but depends on it negatively.  That is, if productivity has increased, one needs fewer workers to produce a given amount of output.  If one can only sell so much of output due to slack demand, and if productivity growth is strong, then employment growth will be weak.  This has been the story of the recovery during the Obama term, and it is only in the last year, when the pace of productivity improvement slowed, that one has seen a more steady increase in the number of employed.

Productivity growth is due to many factors, and for the economy as a whole it will not change quickly due to any policy action.  It will vary over the course of the business cycle, as seen in the diagrams above, where it will normally (although not necessarily always) fall at the onset of the downturn (as firms will usually be slow to lay off workers as demand for output slows), and then rise significantly once the recovery begins (as firms will usually also be slow to hire additional workers as demand for output increases, but instead use existing workers more).

The current downturn and recovery was not that much different, although the swings were more extreme this time as the downturn was more extreme.  But what was different in the current cycle is that in the recovery (as discussed in the March 3 blog posting), demand from government spending did not increase as it had in previous recoveries, but rather was flat and then fell.  Furthermore, demand from housing construction was extremely depressed, due to the size of the housing bubble and subsequent collapse.  Recovery in GDP, and hence in employment, has therefore been slow.

IV.  Conclusion

There is no factual support for the Republican assertion that overbearing new regulations from the Obama administration has led to weak job growth, due to the negative impact of such regulations on productivity.  Indeed, the argument is quite confused, since for any given level of output, higher (not lower) productivity means fewer workers are needed to produce that output, which hurts immediate job growth.

The path of labor productivity in the current downturn and recovery has in fact been within the bounds seen in other downturns and recoveries in the US over the past four decades.  If anything, productivity fell somewhat more sharply than in most of the others during the last year of the Bush presidency, and more rapidly than most of the others after Obama took office.  And it is this relatively rapid growth of labor productivity during the Obama term, coupled with weak GDP growth (due to fiscal drag and the collapse in housing) which explains the weak recovery in employment.

It should be emphasized that productivity growth is good over the longer term, as it leads to a higher level of output and hence overall income at the full employment level of GDP.  But when the economy is operating at less than full employment GDP, higher productivity will translate into fewer jobs than otherwise.  The way to resolve this is to bring the demand for output back up to the level of output that could be produced if all resources (in particular labor) were fully utilized.  It is a terrible waste, as well as a human tragedy, to allow such unemployment when the needs are so great.

The Impact of Reagan: Good for the Rich, Bad for Most

Posted on by

No belief is more firmly held in Republican dogma than that the Reagan “Revolution” turned the US economy around from perpetual stagnation to strong growth, with consequent benefits for all.  It is now 30 years since Reagan took office and started his program of tax cuts, financial deregulation, and other measures, and we therefore now have 30 years of data to see what the impact has been.  We can compare this to how the US economy performed in the 30 years before Reagan, 1950 to 1980, to see what the differences have been.

We will do this with a series of graphs, starting with:

This shows the path of per capita real GDP, real labor productivity, and real hourly compensation (everything will be in real terms in this note).  Per capita GDP grew by 94% over this 30 year period, or an average of 2.2% a year, while labor productivity grew by a bit more, by a total of 113% or 2.5% a year.  Real hourly compensation grew similarly, by 100%, for a 2.3% annual rate.  In “normal” times one would expect these three measures of productivity and real incomes to grow at similar rates and to track each other, and this is basically what one observes in the pre-Reagan period.

If the Reagan measures helped spur growth, then these growth rates should have shot upwards in the next 30 years.  But one finds:

Per capita real GDP and labor productivity still grew following Reagan, but at a slower rate than before.  Per capita GDP grew only by 65% in the thirty years following Reagan (1.7% a year), vs. 94% (i.e. 45% higher) in the thirty years before.  Much of this difference is due to the weak economy at the very end of the period, due to the 2008 collapse at the end of the Bush administration and only weak recovery after, and it could be argued that one should allow for this.  Growth in the 25 years to 2005 was almost as high as the growth in the 25 years to 1975.  But then growth was strong during the Carter years (despite the widespread and oft-repeated incorrect assertion that the economy was stagnant then), while it collapsed at the end of the Bush Administration.

Growth in the economy ultimately comes from growth in labor productivity, and here the record post-Reagan is consistently weaker relative to before.  Labor productivity over 1980 to 2010 consistently tracks below where it was over 1950 to 1980, and grew by a total of 90% (2.2% a year) vs. 113% (2.5%) before Reagan.

But the really startling difference is in real hourly labor compensation:

Instead of tracking closely to the growth in labor productivity, as one would normally expect, real hourly compensation was well below.  For all workers, average real hourly compensation grew only by 39% (1.1% a year) over the thirty years post-Reagan, vs. 100% in the thirty years before.  There clearly was a change, post-Reagan, but if you were a worker, it was sharply for the worse.

The figures so far have been about overall averages:  for per capita GDP, productivity per worker, and hourly compensation per worker.  But it is also of interest to see how the average gains have been distributed across income groups.

First, for 1950 to 1980:

This data comes from Piketty and Saez, and is based on incomes as reported in US income tax returns (deflated to real terms using the GDP deflator).  Taxable income (including income from capital gains) is a different concept from income as defined in the GDP accounts, but the two concepts track each other fairly well over time, so comparisons in terms of growth relative to a base period will be similar.

For 1950 to 1980, one sees that average real incomes, the real incomes of the bottom 90%, and the real incomes of the top 10%, all track each other within a relatively narrow band.  Overall growth (of taxable income) was 85% (2.1% a year), with slightly more (88%, still 2.1% a year) for the bottom 90%, and a bit less (80%, or 2.0% a year) for the top 10%.  Pre-Reagan, all income groups shared similarly in income growth.  A rising tide lifted all boats.  And with incomes of the bottom 90% growing a bit faster than that of the top 10%, income equality improved some.

But things changed post-Reagan:

First of all, note that the scale here is very different than that in the previous graphs.  Note also that the data goes only up to 2008, the most recent year for which such US income tax return data has been released in a form that Piketty and Saez could analyze.  Note also that with the economic collapse in 2008, some comparisons can better be made using 2007 instead of to a trough in the business cycle.

For the full period of 1980 to 2008, average real taxable income for everyone grew by 60% (1.7% a year).  This is a somewhat slower pace than that for the thirty years before Reagan (where average real taxable income grew by 2.1% a year), consistent with and similar to the slower pace noted above for per capita real GDP.  But real incomes of the bottom 90% grew only by a total of 26% over 1980 to 2008, or 1.1% a year.  In contrast, the top 10% saw their incomes grow by 122% in the post-Reagan period, or 2.9% a year.  Distribution became more unequal, with incomes of the top 10% growing substantially faster than the incomes of the bottom 90%.

But what is startling is the growth in the shares of income going to the increasingly rich.  The top 10% enjoyed income growth over 1980 to 2008 of 122% (2.9% a year), vs. just 26% for the bottom 90%, as noted above.  But the top 1% enjoyed income growth of 234% (4.4% a year) over this period, while the top 0.1% saw their real incomes grow by 387% (5.8% a year), and the top 0.01% saw their incomes grow by 527% (6.8% a year).  The super-rich became far far richer.

Furthermore, the last year of the Bush Administration, 2008, was a year of economic collapse, with the stock market also crashing.  There were few capital gains to report as part of taxable income.  If one takes 2007 rather than 2008 as a more reasonable point of comparison, real income growth over the 27 years post-Reagan was only 33% for the bottom 90%, but 149% for the top 10%, 306% for the top 1%, 523% for the top 0.1%, and 716% for the top 0.01%.  Distribution became sharply worse.

To summarize:

1)  Overall growth in per capita GDP and in labor productivity was not higher post-Reagan, but rather was lower.  Per capita GDP, relative to the starting point, grew by 45% more in the 30 years before Reagan than in the 30 years after Reagan.

2)  Before Reagan, the paths of per capita GDP, labor productivity, and hourly compensation, tracked each other fairly closely.  After Reagan, hourly compensation rose at a far slower rate than labor productivity or per capita GDP.  Wage earners did far worse relative to others post-Reagan.

3)  Before Reagan, the incomes of the bottom 90% and the top 10% grew at fairly similar rates.  Indeed, income growth of the bottom 90% was a bit higher than that of the top 10%, indicating some move in the direction of greater equality of incomes.  But this was shattered post-Reagan, with the bottom 90% seeing income growth of just 26% over the 28 years from 1980 to 2008, while the top 10% enjoyed income growth of 122%.  But even this growth by the top 10% was small compared to that enjoyed by the top 1%, top 0.1% and especially the top 0.01%.

In other words, if you are among the rich, and especially the super-rich, you have benefited post-Reagan.  It is this elite that account for most of the money given to political campaigns, who drive the political discussion, and from the evidence considered here, have good reason to believe Reagan was positive.

But for the economy as a whole, and especially for those in the middle and lower classes all the way to the 90% mark, growth in living standards was far better before Reagan than it has been after.

Why Have Productivity and Profits Gone Up During Obama’s Term?

Posted on by

In the post immediately preceding this one (see directly below, or here), I noted that a glance at the economic data makes clear that productivity and profitability have both increased under Obama.  Hence, the argument made by Mitt Romney and the other Republican candidates that onerous regulations imposed by Obama are the cause of disappointing job and output growth, is simply not correct.  If new regulations were such a problem, one would have expected productivity and especially profitability to have suffered, and yet both have improved.  Indeed, profitability has sky-rocketed.

For convenience, here is the basic graph again:

But this naturally then also raises the question of why productivity and especially profitability have gone up by so much under Obama.  Indeed, some might wonder whether Obama’s administration has deliberately favored profits at the expense of wages.

While a full analysis cannot be done here, I find no reason to jump to such a conclusion.  The path of profits is what one would expect over the last few years, with the sharp collapse in output at the end of the Bush Administration and then only a slow recovery with unemployment staying high.  There is the separate issue of the longer term trends, where profits have been growing as a share of National Income since about 1980 (for the last decade, see here, and for the underlying data and the longer term see the BEA data at here).  But the fluctuations over the last few years can be well understood in terms of the short term dynamics of the economic collapse and subsequent slow recovery.

Specifically, profits fell sharply in the economic downturn at the end of the Bush Administration, and started to to fall (per unit of production) as far back as 2006.  It is worth noting that housing prices peaked in the first half of 2006, and the economy began to slow after that.  A collapse in profits when the economy collapsed is as one would expect.

In response to the economic downturn, the Federal Reserve Board cut interest rates, ultimately to historically low levels of essentially zero for rates on risk-free assets.  Coupled with other aggressive Fed measures, as well as the TARP program to stabilize the banks (launched by Bush) and then the Obama stimulus program, the collapse was halted and the economy then started to grow in the middle of 2009.  Profitability then recovered.

The business response to the downturn was to lay off workers, as they always do in a downturn, and then later they invested in new machinery and equipment.  The investment was spurred in part by the low interest rates following from the Fed policies, and indeed the recovery in non-residential private fixed investment was surprisingly strong (see here).  Both these actions increased labor productivity, as shown in the diagram above.

But aggregate demand growth remained sluggish, despite the growth in private investment.   The downturn was due primarily to the bursting of the housing price bubble that the Bush Administration regulators had allowed to build up (or at least made no attempt to limit).  As housing prices collapsed, home owners became poorer and many ended up with mortgages that were larger than the now lower values of their homes.  Stock prices also fell, hurting retirement and savings accounts.  Coupled also with worries generated by high unemployment, households hunkered down to consume less and try to save more.  Private consumption stagnated.  And after the Obama stimulus plan was passed (helping to stop the free-fall in output and to turn around the economy), political pressures from the Republican Party and especially the Tea Party wing made it impossible for government to maintain a high enough demand to fill in the still large gap in aggregate national demand.

As a consequence, the recovery in growth was limited and unemployment has stayed high.    This has kept wages largely flat.  But labor productivity rose due to the large early lay-offs and later the growth in business investment.  With wages flat but labor productivity higher, unit labor costs fell.

In addition, there are non-labor costs (not shown in the diagram) which also fell.  The main component of such costs that fell was interest payments, which the Fed reduced to the maximum extent it could to try to spur the economy.

With both unit labor costs and non-labor costs down, profits rose and rose sharply.