Productivity still very much stalled against the effective demand limit

Just a quick update to the productivity chart. (quarterly data, link to data)

prod & ED 6

What does this graph show? When the economy is approaching the effective demand limit (red line), productivity stalls. Then a move toward an economic contraction will release a productivity increase.

Note: The red line is the effective demand limit, where real GDP (Y) equals effective demand (E).

As one can see in the graph, it is normal for productivity, as measured by real GDP/total labor hours, to stall out and move horizontally to the left until it reaches the effective demand limit. And then the line will sit in one place for years.

It should not be surprising to anyone that productivity is constrained by demand. If productivity was to increase with the same labor hours, there would not be effective demand to absorb it. And if labor hours are reduced to increase productivity, the result is a reduced real GDP, not higher productivity. Why? Lower labor hours also results in less effective demand from lost wages. There is a zero sum balance between real GDP and effective demand in terms of labor hours, when real GDP gets close to effective demand.

When the line begins to move in a northeast direction, real GDP will rise in relation to labor hours and so will effective demand. That may seem like a good thing, but as the line starts to move in a northeast direction, an economic contraction begins to form. During a contraction, effective demand rises giving space for productivity to rise. (see when line balloons out to right and rises) An economic contraction is a price to pay in order to get increased productivity.

The line has not starting moving in a northeast direction yet.

Related article:

Lambert, Edward. Productivity really is demand constrained. Effective demand blog. 7/27/2013