Productivity and employment

The current economic recovery in the U.S. has been characterised by a remarkably rapid rise in productivity – that is, in output per working hour. By using new technologies, firms have been able to produce without hiring as many new workers as they would have in a more traditional recovery.

The productivity growth rate jumped to an annual rate of more than 4 percent in the period since early 2001 after rising at 2.6 percent a year from 1996 to 2000 and at less than 1.5 percent a year in the previous quarter-century.

That 4 percent productivity growth rate meant that firms were able to increase output by 10 percent in the past two-and-a-half years without hiring any new workers or increasing the average hours worked per week.

And during the second quarter of this year, productivity rose at an annual rate of nearly 7 percent.

Strong productivity growth will eventually lead to more jobs as higher wages stimulate consumption and higher profits induce more investment in business plant and equipment.
But there is a time lag. One negative influence on the rate of new hires is the distorting effect of unemployment insurance:

Unemployment benefits typically equal about half of the pre-tax wage – however, they replace about 60 percent of those wages after-taxes.

Thus, an individual whose pre-tax wage was $600 a week loses less than $200 of spendable income by remaining unemployed for an additional week.

When Congress extended the maximum duration of benefits from the usual 26 weeks to 39 weeks last year, it slowed the rate at which the unemployed found jobs.

Statistical studies show a substantial effect of unemployment benefits on the duration of benefits and a significant surge in job finding in the weeks just before benefits run out.

Source: Martin Feldstein (Harvard University), There's No Such Thing As a 'Jobless' Recovery, Wall Street Journal, October 13, 2003.

For WSJ text (requires subscription)
http://online.wsj.com/article/0,,SB106600886645387500,00.html
For more on Unemployment http://www.ncpa.org/iss/eco/

FMF Policy Bulletins/ 21 October 2003