Strong post-recession gain in productivity contributes to slow growth in labor costs

Monthly Labor Review, Dec, 1984 by Lawrence Fulco, J.

How do changes in productivity and costs during the current economic recovery compare with earlier ones? Does the six-quarter recovery reflect a resurgence of the higher pre-1973 trend in the growth of output per hour?

Although postwar recessions have differed in length and severity, movements of productivity and cost measures follow a common pattern. Generally, employers tend to delay trimming payrolls in the face of uncertain or slack demand in order to postpone the costs associated with layoffs until the nature of weak demand becomes apparent. The resulting delayed cutback in hours contributes to the initial drop in productivity. If a contraction persists, average weekly hours are initially reduced. Eventually, employment cuts also occur, and productivity may actually increase if the belated declines in hours outstrip the fal in output.

At the trough of the business cycle, capacity utilization is low, with plant and equipment operating below optimum or design rates because of weak demand for output. Inefficient plants and equipment may be idled completely as demand may be met using only the newest, most efficient facilities. Workers who have been retained may also perform deferred maintenance or other duties previously handled by laid-off coworkers. However, these "hoarded" employees may be those with the greatest seniority, experience, and training specific to the firm(s needs, making them the most costly to replace.

When demand begins to revive, output can often be boosted without causing commensurate increases in the payroll. Firms respond by using some idle plants and equipment and by redirecting existing labor to production-related tasks. This results int he rapid productivity gains which have characterized the immediate posttrough period of each postwar recovery. The "productivity dividend" continues as long as output gains exceed additions to paid hours.

Employers tend to accommodate growing demand by initially lengthening the workweek. But as the uptrend continues, furloughed workers return and hiring may begin. The pace of productivity growth slackens as hours increase, and when new workers are hired, trained, and assimilated. The least efficient plants are reopened last. Periods of recovery

During the six quarters since November 1982 (the trough of the last recession), output per hour int he nonfarm and manufacturing sectors grew more than the postwar average trend. A period of faster-than-trend productivity growth also occurred after each of the seven previous postwar recession troughs. Nonfarm productivity growth averaged 2.5 percent per year between 1947 and 1973. In the siz quarters following the trough of the five recessions, growth was nearly half again as fast (at an annual rate). The following tabulation compares the productivity trend with recovery growth rates before and after 1973:

After 1973, the long-term trend in productivity growth slowed in the nonfarm sector. During 1973-83, the average 1984-73. However, productivity advances during the six posttrough quarters slowed much less than the overall trend. As indicated, during the first five recoveries, productivity grew at a 3.6-percent annual rate during the first six quarters after the trough. Since 1973, we have experienced three additional recoveries, during which productivity advances averaged 3.4 percent per year. The reduction in the pace of productivity growth during recoveries after 1973 was smaller than the slowdown of the long-term trend. Thus, productivity increased during the pre-1973 recovereies at 1.4 times the long-term rate; after 1973, the recoveries averaged four times the slower trend which characterized the last decade.

The manufacturing sector--which is much smaller than the nonfarm business sector--tends to be more volatile. As in the nonfarm business sector, the trend also slowed; between 1984-73 and 1973-83 the average annaul rate of productivity growth declined from 2.9 to 1.8 percent. But in contrast to the more comprehensive nonfarm business sector, the gains in the recovery period have been larger since 1973. In the first five recoveries, productivity advances averaged 4.8 percent annually; in the three most recent rebounds they averaged 5.7 percent and the most recent recovery showed gains at a 4.5-percent annual rate.

The highest nonfarm productivity growth occurred after the three troughs when output per hour advanced at a 4.1-percent annual rate. The smallest posttrough gain occurred following the 1980 trough. (See table 1.)

From the standpoint of productivity advance, the current recovery is somewhat stronger than the average of similar stages of recovery in the nonfarm sector and weaker than average in manufacturing. Chart 1 compares movements in productivity and related measures in this recovery with the average of the previous seven recovery periods in the nonfarm and manufacturing sectors.

In the six posttrough quarters, nonfarm output has increased at an average annual rate of 7.0 percent in the previous cycles, but the advance after the most recent trough has been faster--9.8 percent. Hours have also rebounded from the trough level more rapidly than during past recoveries.