Productivity Keeps on Growing

The BLS released its second quarter estimates of productivity growth in the US. The headline numbers were a 2.9% increase in business productivity (excluding the farm sector), and a 4.9% increase in real hourly compensation. These are both high numbers, suggesting that businesses are continuing to find ways to boost labor efficiency. The latter number is particularly satisfying to me – real compensation has been lagging productivity growth for quite some time, and it would be nice to see it catch up a bit.

But to get a better picture of the growth in productivity and compensation, you really should look at a period longer than one quarter. The following chart shows the 12-month change in both series since 1991.

The two most conspicuous features of the chart are: a) how closely the two series generally follow each other; and b) how wide the gap between them has been over the past three years. Lots of people will argue that the explanation for this gap since 2001 is increased global competition. I don’t think that’s the culprit, however, mainly because import growth between 2000 and 2004 has been far lower than it was during the 1990s. The fastest increases in imports into the US happened during the period 1995-2000, precisely when labor compensation grew the fastest. So it seems unlikely to me that increased imports are the cause of the divergence.

Any other good candidates? My preferred hypothesis is the reduction in competition over the past few years (see this post for more on the subject), though I don’t have good hard data on the matter. If anyone has some good data on competition (e.g. Herfindahl indexes, etc) I’d love to see it. At any rate, the divergence between labor productivity and the compensation workers get is troubling, and we still have a long way to go to close the gap.