The US recently released a truly remarkable statistic. In the third quarter of this year, productivity (output per worker) expanded by more than 8%. When you stop and think about it, that fact is little short of miraculous. In our multi-century history of innovations, urbanization, massive infrastructure projects, industrial revolutions, universal education, information superhighways, steam engines, electricity, and the transcontinental railroad, we have managed to establish an impressive level of production per worker. In three short months with no headline-grabbing advances, we managed to increase that value by one-twelfth. It enabled us to have one of the best months on record in terms of expansion in the Gross Domestic Product despite a stubborn reluctance to hire new employees.
How did we do it? The answer is complex in that there are multiple factors. First, the simple demographic fact that the Baby Boomers are getting older (I am one of them) plays into the process. Because of this phenomenon, we have the most educated and experienced (and, hence, productive) workforce of any country yet recorded. Thus, we start from a good place, which also goes a long way toward explaining how we have seen solid performance (though certainly not this spectacular) in this measure for more than a decade.
Along the same lines, we have experienced a remarkable creation and deployment of new technologies in the recent past. Personal computers, microprocessors, wireless communications, the Internet, and a host of advances in assembly-line functionality have allowed us to do more with fewer workers. Although most notable in manufacturing, this phenomenon is also observed in agriculture, utilities, mineral extraction, and even services. When you combine better equipment with more skilled folks to run it, things can’t help but turn out well.
These two factors, however, only serve to explain a strong trend that is necessary to obtain such a dramatic increase, but are not enough to fully account for it. Another mechanism thrown into the mix is the current stage of the business cycle. As the economy moves from a period of sluggishness to one of expansion, firms are naturally reluctant to go on a hiring binge. Thus, they first try to squeeze everything they can out of their existing labor base. This situation normally persists for only a couple of quarters and always peaks just before the employment phase of the recovery. The unusual level of uncertainty that has been prevalent in the current cycle—fueled first by September 11, then by corporate scandals, and then by the threat and reality of war in Iraq—caused this “jobless” phase to continue for the better (or worse) part of two years. It reached its lofty zenith in the past quarter. Average hours per worker climbed notably; orders went up; and inventories dropped precipitously. Recent numbers indeed suggest that the hiring process has already begun in earnest, but not before the pent up need for it gave us one heck of a kick in output per worker.
Will this growth in productivity be sustained over the long haul? Yes, but certainly not at the pace we recently observed. Are productivity gains a good thing? Without a doubt! Think of what the world would be like if the wheel had never been invented. People expressed concern as the factory systems evolved in 18th century England and mass production revolutionized manufacturing in the US a century ago, but business activity and individual opportunity continued to flourish. At a more selfish level, if I make 10% more stuff and you increase my pay by 10%, my higher standard of living rises without the inflationary downside. One of the primary reasons we were able to enjoy the long period of growth without rising prices in the 1990s was the pattern in productivity. As we move forward in the recovery, which is now gaining strength, the creation of exciting new technologies promises an ongoing pattern of enhanced well-being driven by the engine of productivity.
Simply stated, the stars lined up to give us a quarter for the record books, a pattern we cannot expect to persist as employment begins to rise. Yet the trend from which it sprang is sufficient to enable a healthy economy for years to come.