U.S. productivity boom a bust for workers

WASHINGTON (Reuters) - U.S. businesses are cutting workers’ hours and jobs at a pace that far outstrips the rate of the economy’s contraction, generating a productivity boom that in ordinary times would be a welcome sign of healthy growth.

A man mops the floors at a gas station where he works nightly, taking out the trash and mopping the floors in exchange for ten dollars pay, in Grand Prairie, Texas June 30, 2009. REUTERS/Jessica Rinaldi

It is a bit of mystery why companies are downsizing so drastically, but the consequences are clear. For Corporate America, it means a strong -- although possibly fleeting -- rebound in profits. For employees, it means a dismal job market is getting worse and may not recover any time soon.

“I don’t think anyone fully understands this phenomenon,” Lawrence Summers, the head of President Barack Obama’s National Economic Council, said in a speech on Friday.

“One potential explanation is greater financial pressure on firms in this recession has led them to do anything they can to shed cash flow commitments by laying off workers at a more rapid pace or leaving jobs vacant when people leave,” he said.

Other theories posit that companies bracing for an even longer economic downturn, or perhaps the economy was even weaker than official government data showed.

Regardless of the reason, high unemployment is a political nightmare for Obama and his economic team.

Summers said the jobless rate in this recession is running about 1 to 1.5 percentage points above what would normally be attributable to a slump of this magnitude.

The unemployment rate hit a 26-year high of 9.5 percent in June, far higher than the Obama administration envisioned when it pushed for a nearly $800 billion stimulus package early this year. Critics on both sides of the political aisle have pointed to the persistently weak job market as evidence that either the stimulus was poorly designed or simply too small.


Productivity typically declines during recessions. Hiring workers is expensive, so companies tend to hoard labor and wait out the slump, which means costs stay high while output falls.

The fact that companies are managing to produce more with less labor is good news for profits and helps explain why many companies have reported better-than-expected second-quarter results in recent days.

But it could come back to haunt them if the weak labor market triggers another spike in home foreclosures and credit card defaults, piling more losses on banks just when the financial sector is starting to heal.

Total hours worked fell at about an 8 percent annual rate in the second quarter, Labor Department data shows. Goldman Sachs economist Andrew Tilton thinks second-quarter gross domestic product fell at a more modest 1 percent rate.

“That’s a 7-point gap, and there have only been a few instances in the last 50 years when it has been that wide,” he said. “It’s particularly unusual at a time when the economy is not growing.”

Indeed, the gap appears to have widened last quarter. In the first quarter, when GDP fell at a 5.5 percent annual rate, the number of hours worked fell at a 9 percent pace.

Unless second-quarter GDP is far worse than economists expect, productivity will be positive for five out of the six quarters since the recession began in December 2007.

To be sure, economic data is subject to revision, and the Commerce Department is scheduled to release a slew of revised GDP data at the end of this month, which may show the productivity boom was not nearly as great as it first seemed.

Tilton said some of the productivity gain may indeed be revised away, but the gap between labor and output was too wide to be completely erased by the new numbers.


If the U.S. Federal Reserve is correct in the economic predictions it released last week, the current productivity boom will last at least through 2010.

So will the labor market pain.

The central bank estimated that economic growth will resume in 2010. But unemployment will come down only slightly from a 2009 peak of around 10 percent and it could be five or six years before the economy resumes normal growth and employment.

The White House’s Summers said the unusual rise in productivity and unemployment justified the administration’s approach to fixing the economy.

“If unemployment, and the surprise part of the increase in unemployment, reflects more than just weak aggregate demand, the case for measures to increase the flow of credit and get banks lending again -- as the administration has pursued -- is reinforced,” he said on Friday.

However, the damage may be done. Brian Bethune, an economist with IHS Global Insight, said the longer people are out of work, the harder it is for them to find new jobs.

The average length of unemployment is nearing six months, the longest since the Labor Department began tracking that in 1948, and there is little sign of improvement.

“No matter how much money the federal government wants to pour into training, most training and learning occurs on the job,” Bethune said. “When people aren’t working, their skill sets are decaying.”

Editing by Dan Grebler