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Economic Mystery - Why Is Productivity So Weak? Three Theories


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Neil Irwin, The New York Times  /  April 28, 2016

More than 151 million Americans count themselves employed, a number that has risen sharply in the last few years. The question is this: What are they doing all day?

Because whatever it is, it barely seems to be registering in economic output. The number of hours Americans worked rose 1.9 percent in the year ended in March. New data released Thursday showed that gross domestic product in the first quarter was up 1.9 percent over the previous year. Despite constant advances in software, equipment and management practices to try to make corporate America more efficient, actual economic output is merely moving in lock step with the number of hours people put in, rather than rising as it has throughout modern history.

We could chalk that up to a statistical blip if it were a single year; productivity data are notoriously volatile. But this has been going on for some time. From 2011 through 2015, the government’s official labor productivity measure shows only 0.4 percent annual growth in output per hour of work. That’s the lowest for a five-year span since the 1977-to-1982 period, and far below the 2.3 percent average since the 1950s.

Productivity is one of the most important yet least understood areas of economics. Over long periods, it is the only pathway toward higher levels of prosperity; the reason an American worker makes much more today than a century ago is that each hour of labor produces much more in goods and services. Put bluntly, if the kind of productivity growth implied by the new data published Thursday were to persist indefinitely, your grandchildren would be no richer than you.

But it is also really hard to measure, particularly for service firms. (How productive were employees at Facebook, or your local bank, last quarter? Have fun trying to figure it out.)

And even with years of hindsight, economists are never quite sure why productivity rises or falls. During the 2008 recession, labor productivity soared. Was this because employers laid off their least productive workers first? Because everybody worked harder, fearful for their jobs? Or was it a measurement problem as government statistics-takers struggled to capture fast-moving changes in the economy? We don’t know for sure. (Here’s one analysis that emphasizes the first explanation.)

That is a long way of saying we don’t know for sure what is going on right now, or how long it will last. But the possible answers range from utterly depressing to downright optimistic.

The Depressing Scenario

The productivity slowdown is real, and it’s not going away. Earlier waves of innovation in technology (a computer on every office worker’s desk, for example) and management strategies (like outsourcing noncore functions) have been fully put into place across corporate America, and so are no longer increasing productivity.

Add to that a slowdown in capital spending by businesses since the 2008 recession, which means workers aren’t getting better equipment or software that might help them do their jobs more efficiently. Moreover, if you believe the theory mentioned above about low-productivity workers being more likely to lose their jobs during the recession, the people returning to the labor force now may be less effective at boosting economic output for each hour they put in.

In the depressing scenario, Americans’ standards of living are just going to grow more slowly in the future, and there’s not much we can do about it. Fortunately, this isn’t the only possible one.

The Neutral Scenario

Maybe we just aren’t counting things right — or, to use the economists’ preferred term, there is measurement error.

After all, entire industries are being transformed in ways hard to account for in data on gross domestic product, particularly in technology and services. Having a high-powered computer in our pockets and social networks that let us stay in touch with friends may make us better off than the narrow math of gross domestic product — which counts only what we pay for — would suggest.

Still, it’s not clear why these nonmarket gains in quality of life would be so different now than they were in earlier generations when, for example, videocassette recorders became widespread or the air became cleaner thanks to environmental regulation.

“The issue is not whether there’s bias,” wrote the economists David M. Byrne, John G. Fernald and Marshall B. Reinsdorf in a paper on measurement issues in productivity at the Brookings Papers on Economic Activity this spring. “The question is whether it’s larger than it used to be.”

Their conclusion, after examining tech and other measurement issues, is that it isn’t. That said, the tools that statistics-keepers use to measure the economy are never perfect, so there could be problems not yet understood that are creating a false impression of a productivity drought.

The Happy Scenario

Think about a business that is investing for the future. It hires a bunch of people and opens new offices and builds new factories. But while it is doing all that stuff, its actual productivity is quite low. It has a lot of people working a lot of hours, but very low economic output until its operations are fully up to speed.

Maybe, just maybe, that is happening with the United States economy writ large. Businesses are adding workers in preparation for the future, but it will take time for their investments to pay off in terms of gross domestic product.

There’s a recent precedent for that pattern. In the late 1990s, the stock market was booming and companies were making huge investments in staff, equipment and information technology. But reported productivity growth was actually below the long-term trend — only about 1.7 percent a year from 1993 to 1998, for example. Then it began soaring in the years that followed, particularly in the early 2000s.

But here’s one piece of evidence that the pattern of the 1990s is not what is afoot today: Business investment spending on equipment, intellectual property and structures is low relative to the size of the economy. You’d expect those numbers to be higher if this was just a productivity lull as the economy waits for big investments in the future to pay off.

Still, there could be enough going on below the surface of those overall numbers that the optimistic case remains plausible. To use one example, engineers at several companies are hard at work trying to perfect driverless cars. At present, they are a sap on productivity — they put in many thousands of hours of work with no economic output to show for it. But if successful, their work could radically increase the nation’s productivity in the decades ahead.

Apply the same across a wide range of fields — industrial goods, pharmaceuticals and medicine, financial technology firms — and optimism becomes more plausible. That’s the scenario we should all hope is occurring: Slow productivity growth now is just a down payment on a much brighter future.

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The mystery of weak US productivity

Edward Luce, The Financial Times  /  May 29, 2016

Economic output is the ultimate test of our ability to create wealth

Look around you. From your drone home delivery to that oncoming driverless car, change seems to be accelerating. Warren Buffett, the great investor, promises that our children’s generation will be the “luckiest crop in history”.

Everywhere the world is speeding up except, that is, in the productivity numbers. This year, for the first time in more than 30 years, US productivity growth will almost certainly turn negative following a decade of sharp slowdown. Yet our Fitbits seem to be telling us otherwise. Which should we trust — the economic statistics or our own lying eyes?

A lot hinges on the answer. Productivity is the ultimate test of our ability to create wealth. In the short term you can boost growth by working longer hours, for example, or importing more people. Or you could lift the retirement age. After a while these options lose steam.

Unless we become smarter at how we work, growth will start to exhaust itself too.

Other measures bear out the pessimists. At just over 2 per cent, US trend growth is barely half the level it was a generation ago. As Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything.”

It is possible we are simply mismeasuring things. Some economists believe the statistics fail to capture the utility of setting up a Facebook profile, for example, or downloading free information from Wikipedia. The gig economy has yet to be properly valued. Yet this argument cuts both ways. Productivity is calculated by dividing the value of what we produce by how many hours we work — data provided by employers. But recent studies — and common sense — say our iPhones chain us to our employers even when we are at leisure. We may thus be exaggerating productivity growth by undercounting how much we work.

The latter certainly fits with the experience of most of the US labour force. It is no coincidence that since 2004 a majority of Americans began to tell pollsters they expected their children to be worse off — the same year in which the internet-fuelled productivity leaps of the 1990s started to vanish. Most Americans have suffered from indifferent or declining wages in the past 15 years or so. A college graduate’s starting salary today is in real terms well below where it was in 2000. For the first time the next generation of US workers will be less educated than the previous, according to the OECD, which means worse is probably yet to come. Last week’s US productivity report bears that out.

It is also possible we are on the cusp of a renaissance — we just don’t yet see it. The economist, Robert Solow, quipped: “You can see the computer age everywhere but in the productivity statistics”. That was in 1987. A few years later the computer age showed up in big numbers. By the same token, we may be on the cusp of reaping the benefit of artificial intelligence, personalised medicine or take your pick. This may better fit our own fevered imaginations. Or it could be a chimera.

Until then, the US and most of the west are stuck with a deepening productivity crisis. The slowdown has one manifest effect and a seductive remedy. The first, an embittered backlash against business as usual, is already upon us. Witness Donald Trump’s ascent. Most of his proposed cures for middle America’s anguish are worse than the disease. Shutting down immigration and erecting trade barriers would subtract from US growth. Likewise, it is hard to think of a bigger waste of resources than another budget-busting tax cut for the highest earners. Yet his popularity is clearly fuelled by economic frustration.

One or two of Mr Trump’s ideas, such as investing heavily in US infrastructure, would be helpful. Indeed, at a time like this, it is all but a given — and a rare point of agreement with Hillary Clinton. Research shows that a growing share of US growth is created in small number of hyper-connected, urban hubs, such as Los Angeles and the corridor between Boston and New York. Steps that would better link America’s urban boomlands to the large economic backwaters around them would help spread growth more widely. Such projects would take time to bear fruit. Yet it is worth sticking to that “hunger games” image for a moment.

Imagine the US takes much the same course in the next ten years as it has over the last. That would mean a further corrosion of US infrastructure, continued relative decline in the quality of public education, and atrophying middle workforce skills. It would also hasten the breakaway of urban America’s most gilded enclaves, further enriching the educated elites. It could also, quite possibly, trigger a breakdown in democratic order. If you think Mr Trump’s rise is ominous, picture America after another decade like the last.

Which brings me to the remedy: a universal basic income. UBI has several plus points. It draws support from all parts of the ideological spectrum: libertarian and socialist alike. It would replace today’s messy overlap of benefits and do away with the humiliation of proving your eligibility to federal bureaucrats. Most important of all, however, it would buy a measure of social peace. Today’s stagnation may be temporary or lasting. We have no way of telling. Common sense dictates we must act as though it is here to stay.

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Take a look at trucking- We've been stuck with the same dinky 53 foot trailers and 80,000 pound weight limits since the 80s. Driver skill levels are dropping, and adding emissions equipment and condo sleepers to trucks has resulting in trucking productivity dropping. You see this all over the economy- For example fast food restaurants are trying to make more money by driving wages down instead of saving money by refining their processes so they can make more money with fewer and better paid workers. 

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Take a look at trucking- We've been stuck with the same dinky 53 foot trailers and 80,000 pound weight limits since the 80s. Driver skill levels are dropping, and adding emissions equipment and condo sleepers to trucks has resulting in trucking productivity dropping. You see this all over the economy- For example fast food restaurants are trying to make more money by driving wages down instead of saving money by refining their processes so they can make more money with fewer and better paid workers. 

Your theories contradict themselves. You say we're stuck with less productive equipment, but go on to say driver skills are lacking?!? So you want bigger, heavier trucks when our current "drivers" can't handle a 53' trailer. Trucking companies need to invest in comprehensive driver training (i.e. apprenticeship programs) and driver retention, not larger trucks. Wages are comparatively less now than 40 years ago, with 40' trailers and 73,280 GVW. Every time the trailers get bigger, the promises of increased driver pay never materialized.

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What I'm saying is that many of the non-union cutthroat carriers are not taking advantage of the opportunities to run heavier and longer trucks where legal because they'd have to pay and teach their drivers better. Same with the "condo" sleepers- they're wasting cargo space to keep a low paid and low skill driver rather than pay for professional drivers slipseating. This is the problem in much of american businesses- Instead of developing increased productivity that benefits everyone, they're gouging the worker in hopes of increasing profits. 

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Get the shippers and receivers  to start treating drivers with respect by, dealing with them in a timely fashion.  They don't seem to understand that drivers, and the support staff behind them, would like like to work a some what normal amount of time each day.  12-14 hours days seem to be the norm either Union or non-Union, despite  what Teamsteragrrrl thinks.   Looking at the work we do, Chicagoland, the norm was 3-4 loads a day around the city and the Burbs.   That has slowly become a 2-3 load day due to a number of reasons.  Yet you need to make "x" amount of gross revenue per day to pay wages, benefits and God forbid make a profit.  So rates need to go up and productivity goes down to maintain the status quo.  

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So how do the drivers in europe make more money that we do, with even tighter hours of service requirements?

Because of the reasons you have already mentioned in previous posts. The large truck load companies would rather have a constant churn of inexperienced drivers, than to pay a good experienced driver what he is worth. Maybe E-LOGS will level the playing field, and drivers will someday be compensated for ALL of their time. But I don't expect to see it in the remainder of my career. I questioned my boss about how I will be compensated for the one or two loads I lose every week with E-LOGS, and his answer is you can work 6 days a week instead of 5 to make up for it!?! Work an extra day to make the same money? I don't think so. I don't want to work around the clock, but in reality with E-LOGS, my day will be down to 11 or 12 hours instead of 13 or 14. You just can't take chances anymore especially with a day cab. Maybe the newbies will put up with that kind of abuse but I'm too old for that.

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On May 30, 2016 at 5:05 PM, Underdog said:

Because of the reasons you have already mentioned in previous posts. The large truck load companies would rather have a constant churn of inexperienced drivers, than to pay a good experienced driver what he is worth. Maybe E-LOGS will level the playing field, and drivers will someday be compensated for ALL of their time. But I don't expect to see it in the remainder of my career. I questioned my boss about how I will be compensated for the one or two loads I lose every week with E-LOGS, and his answer is you can work 6 days a week instead of 5 to make up for it!?! Work an extra day to make the same money? I don't think so. I don't want to work around the clock, but in reality with E-LOGS, my day will be down to 11 or 12 hours instead of 13 or 14. You just can't take chances anymore especially with a day cab. Maybe the newbies will put up with that kind of abuse but I'm too old for that.

Why would elogs cut your hours to 11 or 12 instead of 14 unless you're fudging your paper logs?  No judging I have done it too but now run elogs and still get 13-14 hours every day as long as I can fit the loads into the time frame. 

The problems we face today exist because the people who work for a living are outnumbered by the people who vote for a living.

The government can only "give" someone what they first take from another.

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Why would elogs cut your hours to 11 or 12 instead of 14 unless you're fudging your paper logs?  No judging I have done it too but now run elogs and still get 13-14 hours every day as long as I can fit the loads into the time frame. 

That's the key...IF you can fit the loads into the time frame. I run a lot of short trips under 200 miles, in major cities, with a lot of loading/unloading time. Too many variables to push the limit. Most days I will have to cut it short rather than try for the late delivery or an extra preload. I figure on losing 1-2 loads per week as a result. Also on Friday nights, I don't plan on staying in a motel 45 or 60 minutes from home. You can bet I'm going to be home after 4 nights away.

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Ok makes sense I was just curious. Don't forget your mandatory 30 min break every 8 hrs which you have to follow with elogs to. I hated elogs at first but don't mind them now. I actually enjoy not having to fill in my coloring book every stop. But my situation is different than yours. I'm paid hourly and paid very well with excellent health insurance, 401k and pension. Hope everything works out for you. 

The problems we face today exist because the people who work for a living are outnumbered by the people who vote for a living.

The government can only "give" someone what they first take from another.

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It may just mean that people are getting lazy. Another big factor is it's hard to find skilled workers that are willing to work. Skilled workers will be much more productive than non-skilled.

More regulations on things like the trucking industry don't help productivity either.

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13 hours ago, m16ty said:

It may just mean that people are getting lazy. Another big factor is it's hard to find skilled workers that are willing to work. Skilled workers will be much more productive than non-skilled.

More regulations on things like the trucking industry don't help productivity either.

Elogs can hurt productivity in the sense that there is no wiggle room for mistakes. 1 minute late for anything (mandatory 30 min break, end of 14 hr shift) and our elogs sends emails to everyone and we get written up. So we're now told if it might make us go over don't try for the load which stinks. Hurts our hourly wage and hurts the company because there is less productivity in a day. 

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The problems we face today exist because the people who work for a living are outnumbered by the people who vote for a living.

The government can only "give" someone what they first take from another.

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