John McCain's Bad Judgment, Part CIII
How Scared Is the McCain Campaign

Productivity Is No Longer Procyclical

This morning's second-quarter productivity release:

Productivity and Costs News Release: Productivity grew 4.3 percent in the nonfarm business sector in the second quarter of 2008, and unit labor costs declined 0.5 percent. In manufacturing, productivity fell 2.2 percent in the second quarter of 2008; unit labor costs rose 6.2 percent. All rates are seasonally adjusted annual rates...

From J. Bradford DeLong and Robert J. Waldmann (1997), "Interpreting Procyclical Productivity Movements: Evidence from a Cross-Nation Cross-Industry Panel," Federal Reserve Bank of San Francisco Economic Review 1997:1 (Spring), pp. 33-52:

We use an international panel data set of value-added by industry to see if labor productivity is procyclical in response to demand shocks. It is: holding fixed our proxy for supply-side factors--the value added levels of an industry in other nations--industry-level productivity rises when value added in the rest of manufacturing rises. Moreover, increases in unemployment are associated with a lowered degree of procyclicality in the U.S. and with heightened procyclicality in Europe. This suggests that procyclical productivity arises primarily from “labor hoarding” by firms in the U.S. that wish to avoid future training costs and primarily from “job hoarding” by workers in Europe who wish to avoid unemployment.

It used to be that labor productivity was procyclical: businesses would hold onto workers in downturns even when there wasn't enough for them to do--would put them to work painting the factory--because the match between businesses and their skilled, experienced workers was valuable, and businesses did not want to see their skilled, experienced workers drift away in a temporary downturn and then have to go through the expense and loss of training new ones. We know this because when the overall unemployment rate rose higher, and so there were fewer places for laid-off workers to drift off to, labor productivity became less procyclical.

That era is over. (Well, there is still a very small sign of it in manufacturing.)

These days U.S. labor productivity looks to be countercyclical: firms take advantage of downturns in demand as an opportunity for them to rationalize operations and increase labor productivity, pleading business necessity in the face of the downturn to their workers.

This is, I think, another reason to call a recession.