Sales declines due to the pandemic hurt productivity, but economists expect things will improve this year as many businesses return to pre-COVID working conditions.
By Manuel Gutierrez Consulting Economist to NKBA
There are basically two ways by which an economy can grow: either by its population working more (e.g., adding more workers or existing workers putting in more hours) or by increasing the output of each worker. Traditionally, those two components are used in combination to arrive at real output, or Gross Domestic Product.
Some countries that are facing declining populations, such as Japan or Russia, have to rely on productivity improvements for their GDP to grow. The United States still enjoys the benefit of a growing population base, from immigration as well as internal growth, which ensures that this element will contribute to growth for at least the near future.
U.S. GDP grew at a robust 3.6% annually between 1987 and 2010, but growth slowed to an annual average of 1.8% since 2010. At the same time, total working population rose 1.2% and 0.7%, respectively, in each of those two periods.
Figure 1 displays quarterly productivity for the U.S. manufacturing sector from 1987 through last year. The percentage figures next to each of the two red dashed lines reflect the average productivity growth for each of those periods.
Between 1987 and 2010, “Output per Person” rose at an annual average of 2.4%, which, combined with the 1.2% average growth of the working population, resulted in the 3.6% GDP growth figure. Over the last 10 years, productivity growth slowed to just 0.3%, which, combined with the 0.7% growth in population, is short of the 1.8% average growth in GDP. The difference is based on other factors, such as capital, that is not included in the calculations.
Figure 2 captures the productivity of all factors involved in the production of the nation’s output. This measure, called Multifactor Productivity, includes the value of all goods and services used to produce the amount of national output.
Consistent with the data shown in Figure 1, which purports that labor productivity grew very slowly since 2010, Multifactor Productivity also grew at an annual average of 0.7% over the same period. Figure 1 shows that prior to 2006, productivity rose at an annual rate of 1.7%, and dropped to just 0.5% between 2006 and last year, despite the sharp jump in 2010.
Another measure related to productivity is Unit Labor Cost, which is an estimate of how much businesses pay workers to produce one unit of output. This measure, shown in Figure 3, takes into account both the hourly labor costs paid by businesses and the output produced by workers.
The measure is calculated in terms of units of output, or, how much it costs to produce one unit of output. Hourly wages can increase, but if the output does not change, the resulting unit labor costs are higher.
Unit labor costs rose at an annual average of 1.6% until last year, when many businesses saw sharp declines in sales. Even though a fair number of businesses were able to reduce their number of employees, the decline in sales, or output, resulted in a dramatic increase in unit labor costs, which grew to 5.6% in the second quarter of last year. This brought the average increase to 3.8% for full-year 2020.
This year is expected to show an improvement, however, as many businesses return to pre-pandemic working conditions.
