Monday, April 16, 2007

US productivity revisited

Interesting article here about the slowdown in US productivity. Basically there are short-term impacts to productivity that are dependent on the business cycle and long term impacts that are dependent on the "fundamentals".

Short term influences happen because during an expansion period in the economy, companies may delay hiring, which means that fewer people do more work. During a slow down, companies delay letting people go, which means that more people do less work. This is just a quirk and is more indicative of whether or not the economy will slow down in the short term.

Long term influences are more important. These depend on the right regulatory framework, investment by companies and technology.
The Economist report seems to suggest that productivity growth in the non-housing sector in the US is growing at a robust 2.8%. This is "good" news. This means that outside of the housing sector, which is currently massively bloated and is slowing down, companies are doing more with less. However, on the whole, productivity growth in the US is slowing (because housing and construction are weighed so heavily).

Productivity growth, for those who don't know, is important because this is the key driver for economic growth. This means that prices go down because fewer resources go into producing more and people earn more because they are producing more (incidently, this is one of the reasons why an Indian worker typically earns less than a US worker - because of the massive differences in productivity).

Stagnant productivity means that wages can't go up without impacting inflation and prices remain constant or even increase because increased competition for the same resources will drive up prices. Stagnant productivity growth means that the economy can't grow very fast without causing inflation unless the working population is growing.

No comments: