Sluggish Productivity Hampers Wage Gains

   < < Go Back
from The Wall Street Journal,

Tepid Growth Restrains Worker Pay, Despite Added Jobs

Based on the jobs data alone, the American economy is doing fabulously.

Monthly payroll growth this year, averaging 267,000, already is ahead of last year’s impressive tally, which in turn handily beat the prior year. The unemployment rate, at 5.5%, is now in the range some economists consider “full employment.”

But overall economic growth has been less impressive. That’s because productivity—the amount of goods and services each worker produces—is growing at a tepid rate.

Since the economic expansion began in 2009, annual productivity growth has averaged just 1.3%, if the farm and government sectors are excluded. That is the weakest growth of any expansion since the 1970s. On Thursday, the day before the encouraging February jobs data were released, the Labor Department reported that productivity in last year’s fourth quarter didn’t grow at all from the year-earlier period.

On Friday, several economists lowered their estimates of GDP growth for the first quarter, some to as low at 1.5%, annualized, citing weak trade and car sales and the effects of snowstorms. Even if the weather effect proves temporary, economic growth shows few signs of breaking out of the 2% to 2.5% range where it has been since the expansion began.

Productivity matters because it is the ultimate source of a rising standard of living. The more a worker produces, the more the employer can afford to pay. Over time, real wages—those adjusted for inflation—are determined by productivity.

Hourly wages have grown by an annual average of just 2% since the expansion began. In February, they rose just 0.1% from January, and 2% from a year earlier.

Real wage growth has generally lagged behind productivity growth during the expansion. That has confounded economists and Federal Reserve officials. Most blame slack in the labor market that isn’t captured in the unemployment rate, such as the many people working part time who would like to work full time.

Still, even if real wages do catch up with productivity, the scope for significant gains will be limited if productivity itself doesn’t pick up.

Why has productivity performed so poorly?

Faulty data may be partly to blame. Chris Varvares of Macroeconomic Advisers, a consulting firm, contends that data on workers’ hours are more accurate than data on how much they produce, and that revisions should boost both recent output and productivity. Productivity data are notoriously volatile. Both productivity and GDP were revised upward for 2013. Last year’s figures may have been depressed by unusual weather-related output losses in the first quarter.

The severity of the financial crisis and recession is another possible explanation for weak productivity growth. The deep downturn may have crimped companies’ willingness to invest in the sorts of efficiency-enhancing equipment and software that raises productivity.

Weak business investment has been one of the puzzles of the expansion so far. Mr. Varvares estimates that capital—equipment, software and buildings—per worker has grown just 0.3% a year so far this decade, by far the worst in at least 40 years.

Many new innovations are reliant on equipment and software. For example, a new computer might be necessary to take advantage of the latest computer-aided design software. Thus, the reluctance to invest may have retarded the spread of innovations through the economy.

If this diagnosis is correct, the best hope for a rebound in investment and productivity would be for the economic recovery to gather steam. The more confident that companies are in future sales, the more they will invest. That would elevate productivity, profits and wages, feeding back to spending in a virtuous circle.

More From The Wall Street Journal (subscription required):