Wednesday, February 10, 2010

Productivity growth over the business cycle: preview

I haven't hammered out a story yet, but here's some food for thought:

Lately productivity growth has accelerated, while the unemployment rate has skyrocketed. Some commentators (e.g.) have noted that businesses squeeze more output out of every hour of work, presumably by cutting down on the least productive tasks, jobs, or both. Eventually, the story goes, the squeezing will strain the employed labor force, forcing employers to resume hiring.

From the chart, it's obvious that unemployment and productivity growth are not always positively related. Why? What does it mean when they're not? What does the relationship tell us about an eventual job recovery?

Hopefully I'll find the time to write something soon. Stay tuned.


Miles said...

Part of the economic problems today are because of companies hoarding profits...

Corporate profits are surging, but the profits are not being spent. In the US in 2006 the proportion of corporate profits to GDP hit an all time high. The combination of globalisation and technology meant money was flowing to capital, but not to consumers. The only occasion the ratio of profits to GDP had gone close to a similar level was in 1929. Recent data from the US has indicated that corporate margins are on the up again, and are approaching the record 2006 level. The US gross operating surplus was 29 per cent in Q4, compared to 29.9 per cent in 2006. And labour’s share of income generated by US non-financial companies dropped to 62 per cent, almost as low as in 2006. In the UK, it is a similar story. Ernst and Young said “The household sector’s share of national income is counter-cyclical and last year this shot up from 70.3 to 73 per cent. However, comparing this with the two previous low cycle values of 77 per cent in 1991 and 76 per cent in 2001 reveals a clear deterioration. Similar downward trends in the labour force’s share of national income are evident in all western countries. This seems to reflect what IMF economists have dubbed the ‘globalisation of labour’.

But the problem of the victory of capital over labour is not limited to the UK. Many economists argue that China is in part the cause of the global crisis, because the saving ratio in China is so high. But this analysis may be simplistic. An article from the Far Eastern Economic Review says that individual Chinese will be quite bemused if they hear about Western criticism saying they don’t spend enough. As far as they are concerned, they have seen a spending revolution. The Far Eastern Economic Review piece suggested that the official data on Chinese savings does not show what is really going on. The problem, it says, is not so much that Chinese individuals are saving too much, rather that Chinese companies are saving too much, and it says the real problem here is that Chinese firms do not pay out high enough dividends.

It is like that in Germany. Germans are proud of the way that have accepted low wage rises, and in turn German industry has become more competitive. But this has effectively meant German companies have been flushed with cash. It was like that especially during the boom, when this cash flooded into money markets, pushing up house prices.

The problem of corporate savings is endemic. Money exists, but the world has become risk averse. Perversely, savers seeking to reduce risk, are pumping up a bubbles in asset prices. While the sovereign debt crisis becomes more serious, money flows into US, German and UK government bonds.

Ivan Kitov said...

This is a longer comment than one can put regularly. So, I have to refer to my post: