Quelle Surprise, Labor Productivity is Up while Labor Wages are Still Down!

BLS economist Shawn Sprague writes What Can Labor Productivity Tell Us About the U.S. Economy?

Labor worked the exact same number of hours in 1998 as they did in 2013 or ~194 billion hours. While there was no growth in the number of hours worked, the Non-Institutional Civilian Population grew by 40 million people, and new businesses were created by the thousands which should have needed more Labor. Mean while American businesses produced $3.5 trillion in goods or 42 percent more in 2013 than in 1998 even after adjusting for inflation.

To repeat, during this period “the Business sector output grew by 42 percent, Labor hours did not grow at all, and Labor productivity (the difference in these growth rates) grew by 42 percent.” Sprague explains further; “if labor hours had grown instead by 10 percent during the period, then labor productivity would have grown by 10 percent less, or 32 percent. If labor hours had instead grown by a full 42 percent, then labor productivity would not have grown at all during the period. These examples illustrate that it is the interplay of output growth and labor hours growth that is fundamentally important to understanding labor productivity.” Labor hours of input did not grown, so what happened?

Increases in throughput (as I would call it) can be achieved through more efficient equipment; faster, experienced or trained Labor; less down time for maintenance, utilization improvements, and less scrap or better materials. “In these and other cases, output may be increased without increasing the number of labor hours used.” I am gong to assume this could mean the addition of more Labor without adding hours.

Here we have a situation of increased business gained through efficiency and the resulting Productivity Gains not going to Labor and remaining with Capital. Shawn Sprague does not really delve into this topic; but, it is apparent within some of the earlier posts by Spencer England Labor’s Share, others as well, and Shawn’s footnote 4. Isn’t this a part of what Piketty is pointing out in his narrative on the growth of inequality?

Shawn’s Footnote 4: While this is possible, it is not always the case that growth in labor income keeps pace with growth in labor productivity. For instance, over the past 30 years, gains in real worker compensation per hour have fallen behind gains in output per hour. This reveals another reason why it is important to measure labor productivity—because it is the yardstick with which we can measure the extent to which additional production per hour of work ultimately ends up translating into additional income per hour of work. More on the topic: The compensation-productivity gap: a visual essay

There is no reason for business to hire more Labor to meet the increased business or shorten the work week to accommodate more workers as it would tighten the Labor Market and increase Overhead and Labor Wages. Best of both worlds for business, increased profits and a loose Labor market.

Hat Tip: Economists View