Productivity in the first quarter plummeted. As demand grows in this recovery, this should force companies to start hiring—at least in the short term.
If you’re reading this story while on coffee break, take your time. Take another sip. Linger over the words. Why be in a rush to get back to work?
A new government report released Wednesday showed that in the first quarter, overall productivity in the business sector fell by 3.2%, a much bigger drop than was initially thought. In fact, this marked the worst slide in productivity since the global financial crisis in 2008, when companies began laying off workers in droves, eventually doubling the nation’s unemployment rate.
This time, however, a collective slack off may be just what the job market needs — at least in the short run.
Actually, a substantial body of academic research shows that over long periods of time, rising productivity leads to job creation, not destruction. In fact, a McKinsey & Co. report found that in all but one 10-year rolling period since 1929, the U.S. economy witnessed both rising productivity and rising employment. This makes sense: Over time, rising productivity helps expand output and profits, which grows the economy, which creates more demand, which eventually leads to the need to higher more workers.
But there are times when this virtuous cycle gets broken. For instance, in the financial crisis. Since then, the recovery has been so slow to pick up that companies could get by without hiring and simply squeezing more work out of their existing employees. This explains why even in a soft economy, companies in the S&P 500 index are posting record high profits.
But demand in this economy, while still soft, has picked up lately, as seen here by the ISM Purchasing Managers Index, which captures (among other things) the pace of new orders:
To meet this growing demand, companies have been boosting factory output, even as the average productivity of U.S. workers has slumped lately.
The result: Employers have been forced to add to their payrolls, albeit incrementally, for fear of losing out on this new business.
This reflects a nuance in the relationship between productivity and employment that was captured in a paper written a while back by economist Carl Walsh for the Federal Reserve Bank of San Francisco. In that report, titled The Productivity and Jobs Connection: The Long and the Short Run of It, Walsh writes that while higher productivity is correlated with job creation in the long run, the short run be an entirely different story:
If firms see the demand for their products rise, they respond by expanding production. And if labor productivity is unchanged, then typically they need to hire more workers to do this. But if labor productivity is increasing, then it has the potential to reduce employment growth, because the firm will be able to satisfy demand using fewer workers.
And right now, with productivity not just unchanged but falling, it looks like employers are going to need to start filling some empty cubicles to catch up.