The BLS report on preliminary Productivity and Costs, Second Quarter 2017 shows nonfarm business productivity increased 0.9 percent during the second quarter of 2017.
Productivity is defined as “real” inflation-adjusted output divided by aggregate hours worked.
The quarterly number is very good, but revisions were massive and the overall trend is dismal. More importantly, the measurement is FUBAR. First, let’s dive into the report.
Labor Productivity and Unit Costs
Supposedly, the charts are seasonally adjusted, but the second chart on unit labor costs suggests something is seriously wrong. Alternatively, or additionally, there are lots of data-gathering flaws.
In regards to the possibility of data gathering flaws, let’s consider real hourly compensation revisions.
Year-Over-Year Productivity – Real Output Per Hour
The last time year-over-year productivity was up by more than 2.0% was nearly seven years ago!
I downloaded the above data all the way back to 1948 to calculate a long term trend.
Productivity Trend 1948-Present
In 2016, productivity was -0.3% in the first quarter, -0.4% in the second quarter, -0.1% in third quarter and +0.8% in the fourth quarter.
THe BLS notes “Annual Average productivity growth in the nonfarm business sector in 2016 was revised down to a decrease of 0.1 percent.”
This was the first annual productivity decline since 1982.
A Spring 2016 Brookings study asked Is Productivity Slowing or Are We Just Measuring It Wrong?
Here is the Brooking’s conclusion: “Productivity Slowdown is Structural, not a Measurement Problem”.
A Vox report says Productivity is Understated Due to Offshore Profits.
US multinational enterprises may legally shift profits from high tax countries (like the US) to low tax countries (like Bermuda). This column uses unpublished survey data to show how this causes part of the US economic activity generated by these multinational enterprises to be attributed to their overseas affiliates, leading to an understatement of measured US GDP and, in turn, productivity. Profit-shifting activity has increased significantly since the mid-1990s, resulting in an understatement of the growth rate of US productivity.
Lost in the Debate
Before one can measure productivity, one needs to accurately measure hours worked and real output.
Real output implies an accurate measurement of inflation. The term “real” means “inflation-adjusted”.
My Take – Productivity Measurement is Totally “FUBAR”
- Hours worked are understated. Because of cell phones and the internet, people work countless unreported hours, even on vacation. Those are hours worked, but neither counted nor paid.
- At the supervisory level, there is pressure on non-hourly workers to put in more store hours. Think Target, WalMart, McDonald’s everywhere. Supervisors do put in those hours (or they do not advance), and those hours go uncounted.
- Pressure builds on truckers to make increasingly difficult (timewise) deliveries. This results in changes in trucker logs to keep truckers driving past the statutory limit of 11 hours. Those hours do not count either.
- Illegal aliens work for less. Home builders and repair crews of all kinds pay illegal aliens less than US citizens. Those wages may or may be reported, but the output (a completed home), is.
- On the inflation front, the only way one can calculate “real” output or “real” wages is to first calculate inflation. If inflation is understated, even by a minuscule amount, the error changes productivity measurements dramatically.
- Inflation measurements do not include asset bubbles or even home prices. Rather, the BLS uses Owners Equivalent Rent (OER) as a substitute for home prices. OER alone dramatically skews inflation, sometimes to the high side, but mostly lower.
Totally “FUBAR” Yet Certainly Overstated (Short Synopsis)
Productivity is measured by taking an artificially high estimate of “real” output divided by an underreporting of hours worked.
- On one hand, we have countless unreported hours worked. This acts to overstate productivity.
- On the other hand, inflation measurements are complete nonsense. “Real” output is much lower than reported because inflation is understated. This also overstates productivity.
Despite two artificial boots, one in the numerator and the other in the denominator, the productivity trend still heads lower! Thank the inflation tactics of central banks.
- August 7: Fed’s Discontinues Labor Market Index
- August 3: Central Banks Puzzled as Global Inflation Hits Lowest Level Since 2009: Solving the Puzzle
- August 2: “Idiosyncratic and Transitory Factors” Holding Down Inflation: New Definition of Transitory
- August 6: Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
- August 7: Tracking the Amazing Junk Bond Bubbles in the US and Europe
Point 1 discusses Janet Yellen’s preferred measure of labor. The Fed quickly discarded the measure because it did not show what they expected.
Points 2 and 3 discuss the Fed’s puzzlement over inflation. Here’s a hint: They do not know how to measure it.
Points 4 and 5 discuss measures of inflation the Fed does not count, but should.
Mike “Mish” Shedlock
Hours of work are not counted done on phones and the internet? My assumption was that hours are overstated considering how many hours are wasted on phones and internet during the work day. How much is Facebook costing employers every day?
When we do see productivity increases isn’t it almost always due to employer investment in technology? What percentage of the workforce actually pays for their own technology and skills? I don’t consider college as contributing much to our productive skills for most employees and it sure seems like most employees expect if not demand that employers train and equip them, and subsequently demand a raise.
take McDonald’s, Target, Walmart
What opportunity is there to spend all day on the phone. None?
White collar desk jobs, perhaps.
Yet I doubt that those working at McDonalds is doing productive work on their phone or internet in off hours.
All of it is a moot point as you suggest, but it is a personal gripe of mine as I see seemingly everyone with a cell phone in their hands….everywhere. My employees build furniture (definitely NOT white collar) and half of them are messing with their phone every other time I look at them. They complain if my WIFI is down and of poor cellular service inside my building….and they are NOT unique. They are becoming like pacifiers where any moment of mental idleness MUST be filled with that little screen. We can’t drive without them, we can do NOTHING without them at least within easy reach.
There is a “spiritual” dimension to this that is little understood. Where people leave their attention is partly where they “are”. Familiarity is often mundane compared to the virtual edge of wider society. How many people reading this would say they would rather be in another circumstance if they had an absolute choice? I will answer that for you as all (from who are able to regain their own imagination for a moment), but modern reality is a half world, where previously it was an uncertain world but very in the present.
So this is the relief and the danger, the forging of a tighter communal interaction and presence or the new opiate of the masses.
We tend to think of absolute power outside of religion as remote destruction by red button, or bureaucratic cohesion that is merciless, but now mankind has for example the means to collectively decide to remotely destroy the framework, or by social media, like this, to form an alternative bureaucracy or system. Equally the use of communication will simply be unproductive in real terms, or at worst will be used to centrally manipulate a society.
It is very much a new frontier in human evolution, on an individual and a societal level.
But I am not sure it will help get a persons furniture built… what happens when you allow the rest of the world to amble around the workspace.
I guess I miss the point of “productivity” if it simply a count of hours worked….but my employees will be glad to hear it! The longer it takes them to complete a task, the more productive they become?
“Because of cell phones and the internet,people work countless unreported hours” your conclusion was not what I was expecting. My conclusion: because of cell phones and internet, people screw off half the day.
Either way the number is FUBAR
But take McDonald’s, Target, Walmart
What opportunity is there to spend all day on the phone. None?
White collar desk jobs, perhaps.
By that measure, how often does a mcdonalds, target, or walmart cashier work while on vacation? None? On the other hand, I see mcdonalds, target, and walmart workers on their phones all the time.
Given the verbal and tactile responses I get from fast food workers I can only hope their excuse is distraction by technology, because MY GOD, I would be shocked if they could negotiate the bus routes to find their way to work.
I’m sure I wasn’t the sharpest knife in the drawer when I was 16, but these people are well past that age and many can barely speak their native language. They are stoned out of their minds or truly retarded….in either case, a poor future for American enterprise.
It is a show they put on on purpose, I am sure of it.
(s/ … I think… maybe not…errr)
Maximus Minimus said:
Productivity is yet another economic indicator designed to make economics look like science. By the same token, there is no point arguing this message to economists when the status of the profession and their livelihood depends on it. The number of cars purchased would be a far more accurate indicator, but would have to be prorated to the interest rate, and total debt. Without that anchor almost all data is meaningless.
Economics is the study of human financial behavior, which is somewhat predictable…somewhat. But as creatures driven by emotion, our government and industries use this behavioral knowledge to predict our choices but also to manipulate them…..more so today the latter.
Ultimately if they can convince us we are rich, regardless of our true condition, then we are RICH. This is what communist countries attempted to do and somewhat successfully for a while, but technology made it impossible to conceal the realities in the rest of the world that destroyed their illusion.
Now they are using that same technology to control us, influence us, manipulate us. They have told us to our face the realities…..that pumping the stock market up would create the “wealth effect” to influence us, that prosecuting criminal bankers would damage our “confidence” in the banking system, that we should ignore our personal economic realities and simply spend….borrow and spend if necessary, there’s never been a better time to buy, houses have never gone down in value, Mortgage defaults in no way endanger the economy. On and on and on.
They are not informing us, they are “forming” us.They are telling us what to think, what we desire and what we hate, and as always, buy, buy, buy. And ALL for our own good, the fact that it makes them incredibly rich while collectively we all become incredibly poorer when considering earnings and debt, is purely coincidental….I’m sure.
Maximus Minimus said:
Just to continue the argument, another anchor is the inflation (CPI) which as Mish mentioned is lacking in accuracy. One derived number is the real GDP which becomes highly questionable. This has gone unnoticed until the central bankers created a host of bubbles among them the property bubble, exposing how fake the whole edifice is.
Measuring human productivity reeks of slavery. A boss will quote for accomplishing a task and set a necessary time limit. Modern labour is sitting in an office n number of hours and trying to get people to do something, anything. School after school.
If productivity is simply $/hr times manhours, then any calculation needs is utterly useless. Until value of manhours is characterized to reflect actual utility of said labor, everything is nothing but a common math equation that truly doesn’t reflect output whatsoever.
Diogenes of Sinope said:
You should see some of the invoices I get from our legal counsel. Almost impossible to figure out the billable hours these attorneys are hitting us for. Productivity? What is that?
Medex Man said:
When a person is standing in line at city hall to pay taxes or pay a fine or pay for a license, that is hours worked (for both the “line stander” and the useless bureaucrat) — but is it productive?
When your doctor’s appointment is for 10am, and the doctor doesn’t actually see you until 10:30 or 10:45 … is that half hour “productivity”? If you run a half hour late and the doctor charges you for a missed appointment, is that productivity or hypocritical?
What is the productivity of thousands of NJ based employees that can’t get through Penn Station in NYC because the MTA and Amtrak neglected basic maintenance for the last 40 years? Money was collected for maintenance, and they got massive federal monies for repairs after 9/11… but several tracks cannot be used because they haven’t had basic repair work done since Reagan’s first term.
Ditto for people on Long Island using the rickety joke called the LIRR. How many thousands of hours does that service waste per day?
Salespeople waste millions of hours at LGA and JFK, LOG, OHA, LAX and other “airports” where “just an hour” delay is treated as par for the course. If the experts at LGA don’t lose some luggage every hour, people get worried something has gone terribly wrong.
There are six lane traffic jams around Dallas and LA. Traffic around NYC and Boston barely moves at all. Our blog host predicts these people will switch to EV traffic jams if these people ever make it to a car dealership.
The USA used to make fun of those dirty, nasty 3rd world countries with their stone age transportation systems. Millions of hours lost to trains that break down, roads that are forever clogged, etc etc.
After decades of public union “productivity” and hundreds of billions spent on shovel ready scams, the USA is now a 1st world transit joke
Reblogged this on World Peace Forum.
Not to mention software development … where develops are writing libraries and gaining skills during their free time but using those same libraries and skills during work-time …
165 millions tones of plastic in the ocean, we don’t need more cheap garbage,reduction in productivity would be a good thing, that is if we value life!
Everywhere you go people have their nose in their phone wasting time. What make you think they put their phone down when they work. Cel phones are productivity killers. Don’t forget the Apple Watch, fitbits etc that also capture people attention all day long.
The moto is: if I pay you I own you. Amazon a good example.
Medex Man said:
Connecticut’s governor just announced that all the people who lost their full time (with benefits) jobs working at gun manufacturers can now go compete (yes, COMPETE) for part time jobs working at Amazon’s warehouse more than an hour away.
No benefits, part time, high probability of being replaced by warehouse robots, extra hour commute — and they get to compete with recent college grads who are buried in student debt. Isn’t that exciting? CT’s dimwit governor was very proud of himself for the part time jobs “he created” to replace some (not all) of the full time jobs he destroyed.
Stuki Moi said:
Like most else attempted to be passed off as economics these days, all “productivity” really is, is yet another measure of debt growth. Debt growth pumps up asset prices, making every asset transaction (which is pretty much the only thing left to do if one wants to make a decent living in bankstertopia) appear to involve more economic “activity” than the exact same thing absent the pumping. Think a realtor getting a 2.5% cut of a house sale when the price is doubled due to asset pumping.
Of course, as is common in all newspeak practicing dystopias, the word chosen to describe this yet-another-roundabout-measure-of-debt-growth, is chosen to fool the less than critical into assuming it measures something meaningful. Something they are told is “good.” Hence, they should wave their flags and cheer on their half witted little rulers, for managing to manipulate it higher.
Productivity is the pulse rate of capitalism. Not to be dismissed. Two issues. Before the 2008 recession, the massive financial profits generated by the banks which was counted as part of the output of the economy boosted productivity. But bankers who generated millions each through speculation may have appeared productive but after the bubble burst they were shown to be productive only of misery. The fall in the “output” of the financial sector is one of the reasons productivity “fell” after the financial crash. Secondly, when the USA monopolised the international value chain it sucked in all this extra value into the economy that was realised when the goods were finally sold and this boosted US output raising productivity. (it reduced productivity in the countries where these goods were produced because being under-priced they reduced output there.) Arguably this transfer of value was greater than the loss of profits which were taken overseas.