Non-farm business productivity rose 3.2% in the fourth quarter of 2008, much higher than the consensus estimate of 2.1%. Meanwhile, real compensation jumped by 15.6% in the fourth quarter, driven by a 5% wage increase and a 9.2% decrease in consumer prices.
These numbers seem great, but off course, this is actually what you'd expect in a deflationary recession. For all the hyperbole about incompetent managers, layoffs are not actually performed at random. They tend to target the least productive workers in the department, or the least productive departments (though of course there are many individual exceptions to that generalization). That means that productivity rises even though output falls. Meanwhile, the increase in real incomes is being driven by a general collapse in aggregate demand that has lowered prices for most classes of goods.
This highlights the ironic fact that recessions can make many, or even most people materially better off, because wages are sticky downward and prices are much less so. Most of what recessions do is deepen the gap between the haves and the have-nots. Those who have a job may experience declining costs and actually improve their purchasing power. But the number of the unemployed rises, the length of the time required to find a new job stretches out, and the net decrease in their welfare far outstrips the moderate increase in the purchasing power of most consumers. Plus, of course, the fear of the abyss among those who aren't in it takes a sizeable toll on welfare.
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I've experienced this. In NYC, I can walk into most any restaurant with a reservation, and buy tickets to a Broadway show the day before showtime for half off. Perversely, these are really good times, especially since my field has high job security right now (corporate bankruptcy attorney).
Within a class or profession, yes, it deepens the gap between those with the same qualifications or background that have jobs and those who don't. (Or, those who graduated from school in the right year and those who did not.) But from another perspective, most of what recessions do is shrink the gap between the haves and have-nots, since the wealthy tend to lose a higher percentage of income, and recession hits things like investment income harder.
MM:
They tend to target the least productive workers in the department, or the least productive departments (though of course there are many individual exceptions to that generalization). That means that productivity rises even though output falls.
Or maybe the system can creak along without the extra people for a while. It's not that they weren't doing anything useful, it's that the lack of them doesn't show up for six months. When whatever they were doing is suddenly needed, that's when you get the drop in productivity.
John Thacker:
...most of what recessions do is shrink the gap between the haves and have-nots, since the wealthy tend to lose a higher percentage of income, and recession hits things like investment income harder.
Looking at percentage of income or even absolute dollar amounts misses the point here. The question is: how much misery does the change create? Rich people can't compete on misery, and nobody wants to hear them bitch.
Great Post, these are the ones that keep me coming back. Oh and I like the product reviews.
Thanks Blaine
What empties seats in restaurants and theatres (thereby increasing the welfare of bankruptcy attorneys) is the rise in savings. Aggregate income - which incudes many fixed entitlements - is sticky downward.
So far as I am aware , no-one has established why productivity tends to rise as unemployment rises; though many commentators (a group now graced by Megan)have made confident assertions.
But there is no doubt that recessions damage the percieved welfare even of many people who are materially better off as a result. Recession can, I suspect, give even bankruptcy attorneys sleepless nights.
This highlights the ironic fact that recessions can make many, or even most people materially better off, because wages are sticky downward and prices are much less so. Most of what recessions do is deepen the gap between the haves and the have-nots
If I had the ear of someone on Capitol Hill, I would be repeating this over and over again.
This is solid evidence as to why the stimulus package should be focusing on putting money in the pockets of people NOW, while prices are low, then on tyring to establish new sectors for economic growth - which the gov't is never good at.
"This is solid evidence as to why the stimulus package should be focusing on putting money in the pockets of people NOW, while prices are low, then on tyring to establish new sectors for economic growth - which the gov't is never good at."
Ha ha. Yes, the private sector is great at finding new sectors for economic growth - like mortgage backed securities and investment banks offering new financial products.
Or maybe the system can creak along without the extra people for a while. It's not that they weren't doing anything useful, it's that the lack of them doesn't show up for six months.
When salaried people have to work longer hours for the same pay, to do the work of the laid-off, that's higher productivity. And in a recession, particularly one as scary as this, people will do that quietly.
And in a recession, particularly one as scary as this, people will do that quietly.
Out of curiosity, because I genuinely don't know, what makes this particular recession so much scarier than all the others that have come before (other than media hype, of course)?
Does this hold given current levels of household debt? In other words, the "haves" do well if they spend a significant percentage of income on food, etc. But if most income is going to student loan payments, mortgage payments, or other debt, then even the "haves" aren't materially better off in a recession.
BP Beckley:
Oh, I agree. But surely you agree, then, that the same point underscores the pointless of focusing on "inequality" and the Gini index in a time of rising incomes and GDP as well? If money income increases, but many less poor are hungry whereas the wealthy can spend their extra dollars on somewhat more expensive cuts of beef, are the rich people really as better off than the poor, despite the dollar inequality increasing?
Someone fantastically wealthy right now can afford to hire a famous musician to play at their kid's bar mitzvah. But that was always true, even in the Middle Ages. Meanwhile, even someone fairly poor can carry around and listen to reproductions of that music at any time, something not possible in the past.
When salaried people have to work longer hours for the same pay, to do the work of the laid-off, that's higher productivity. And in a recession, particularly one as scary as this, people will do that quietly.
Okay, but do you get 100% coverage? I doubt it. Like I said, everything will creak along until there's a crisis. The crisis will be responded to, but that process cuts productivity. Layoffs make crises more likely. I'm not saying the costs outweigh the benefits, I'm saying the costs are nonzero.
But surely you agree, then, that the same point underscores the pointless of focusing on "inequality" and the Gini index in a time of rising incomes and GDP as well?
I think the rising inequality may have been a sign that the increased incomes for everyone but especially for the rich was a sign of a system that was close to catastrophic breakdown. In that context, maybe we didn't pay enough attention to it. That money wasn't free, even though we all thought it was.
Re: They tend to target the least productive workers in the department, or the least productive departments (though of course there are many individual exceptions to that generalization).
This may be true during layoffs in more ordinary times, when firms hitting turbulence just need to trim a little bit. But today's mass jobs cuts are more along the lines of panicky mass carnage. Also, once you start cutting whole departments then you're bound to be losing highly productive people along with those departments even if the departments themselves aren't major money-makers.
By the way, where are all these falling prices Megan keeps blogging about? Gasoline is well down from last years' high, that we all can see (but it's been creeping back up again since New Years). But that's the only thing I've noticed that's cheaper. Groceries haven't changed much (some ups, some downs). Healthcare is no cheaper. the nightclub I frequent on weekends still charges the same cover and the same drink prices. My utilities have gotten no cheaper. My rent is painfully high.
What falling prices?
Out of curiosity, because I genuinely don't know, what makes this particular recession so much scarier than all the others that have come before (other than media hype, of course)?
Do you think we're winning in Iraq, too?
Yes, younger less productive workers do tend to be laid off first. Interestingly this generally explains about 90% of the teenage unemployment rate while the minimum wage has a very minor impact on teenage unemployment. Someone ought to explain the concept of omitted variable to all those people claiming the minimum wage is responsible for the soaring teenage unemployment rate.
But the current example of productivity rising at this stage of a recession is extremely unusual.
Check your data.