Productivity Surge May Hurt Job Growth, Fed Paper Says
Strong levels of productivity are mission into question the U.S. economy’s ability to breed jobs, a new report from the Federal Reserve Bank of San Francisco warns.
The paper, released Monday, follows Friday’s release of the January non-farm payrolls report. The U.S. lost 36,000 jobs and maintained its unemployment rate at 9.7% in the first month of the year. Financial markets greeted the data as a clear, largely because the month’s run of major snow storms had been expected lead to huge job losses. Hiring’s relative resilience in the face of this pressure raised hopes a recovery in progression will soon be attended by rising payrolls.
The San Francisco Fed research raises questions about that outlook. Written by staff economists Mary Daly and Bart Hobijn, the paper looked at the relationship between strong rates of productivity progression and hiring, and found reason to be worried.
“Anecdotal evidence suggests that efforts to contain costs and wait nimble in the face of uncertainty have become a game in business strategy,” the paper said. “If productivity keeps on on the rise at an above-average pace, then unemployment forecasts…could continue to be overly optimistic.”
The paper clarified there’s been a breakdown in how economists view the relationship between yucky domestic product progression and hiring. At issue is Okun’s Law, a forecasting rule used by economists. According to this tool, for every 2% real GDP is below trend, the unemployment rate should rise by 1%.
The economists note that over 2009 real GDP was essentially flat while trend GDP rose by 3%. Under Okun’s Law unemployment should have augmented by 1.5%, when as a replacement for it rose by 3%.
“The surge in labor productivity allowed employers to keep output steady while shedding workers and reducing hours of work in the economy,” the paper said. “As such, it allowed unemployment to rise much more than expected agreed the change in GDP, breaking the normal pattern between the two measures observed over the past 60 years.”
The paper does not offer a prediction of what will happen with unemployment, except to say what many economists reckon will happen may be too optimistic.
Meanwhile, while investors have gotten more upbeat about hiring, officials at the Federal Reserve expect that it will take a long time to get the unemployment rate to fall. They believe businesses, burned by their experiences over the last several years, will be hesitant to hire new workers, and will do so slowly even as demand picks up. That’s a huge reason why plot makers are so loath to raise interest rates.
What’s more, the jump in economic progression that happened in the closing months of last year was largely tied to the rebuilding of stocks drawn down during the recession, and as such, the gains were unsustainable. A cooler pace of progression is very likely for 2010.
Still, for many economists, it remains an open question whether firms will be able to continue to push workers in the way they are now. Just as temporary factors made late 2009 GDP better than expected, it’s doable firms will have to start hiring to better balance their output against demand.
So while the jobs outlook is challenging just about any way you slice it, it remains an outlook fraught with uncertainty.