American worker productivity falls for 5 consecutive quarters

The US has now had five consecutive quarters of year-on-year productivity declines Research by EY-Parthenon using data from the Federal Bureau of Labor Statistics. This has never happened before, in data going back to 1948.

To find out why this is happening, wealth spoke to Gregory Daco, chief economist at EY-Parthenon, the economic research arm of one of the “Big Four” accounting and consulting firms. Daco wrote and spoken extensively on teleworking and the impact of the pandemic on the labor market. He said the low productivity reflects our current environment of high inflation. Remote work is a real thing to consider, Daco said, but it’s not the only factor.

The drop in productivity, Daco tweeted Thursday, is increasing pressure on compensation and driving upwards unit labor costs. “The difficulty is that there is no magic productivity staff,” he wrote. “And cost reduction through redundancies and compressing wage growth is often ‘easier’ and quicker to do.”

break down numbers

Productivity in the US fell 2.7% year over year in the first quarter of this year, EY noted. That’s down 0.9% year over year. At the same time, production increased slightly (0.2%) qoq and hours worked increased by 3%. That means people are working longer hours and aren’t putting out much more product because they’re just not as productive as they used to be.

“If you have an environment where production is outpacing labor growth, that’s a higher productivity environment,” he explains Wealth. “If the opposite is true, if output growth is sluggish but labor growth is strong, you have a weak productivity environment.”

A recovery in productivity will be key to solving many of the economy’s current problems, Daco said, as it would increase supply and thereby reduce it inflationary pressures.

For the past five or six quarters, he says, economic activity has been sluggish even as the country has seen a robust job market and continued job growth. People are working longer hours, he adds, so workloads have also been higher. Unit labor costs rose 6.3% for the quarter, while compensation rose 3.4%. This combination has created conditions for the perfect storm: weak productivity for five consecutive quarters, for the first time since the post-war era.

Daco acknowledged hearing from clients that remote work could make employees work less hard. “We hear similar stories from our customers across all industries about reduced productivity due to the new work environment,” says Daco. He acknowledged that imperfect hybrid arrangements could be a possible cause of the productivity slump.

CEOs like JPMorgan Jamie Dimon and Salesforce Marc Benioff have argued that face-to-face employees simply work harder and better than their remote counterparts. Dimon says long-term remote work just doesn’t work for most employees; while Benioff consistently says workers in the office perform better. Both the bank and the tech giant continued to chatter away Return-to-Office mandatesbut both have given in to a hybrid plan — at least for now.

However, Daco highlighted another factor that he says economists often underestimate, namely that the outflow of workers has been “enormous” over the past 18 months. He points to the last one BLS And BACK According to reports, the number of job offers, hiring rates and termination rates have reached record highs.

“That tells you it’s been very difficult for employers to essentially train their employees and get them up to the levels of productivity that would have been considered normal before the pandemic,” he says.

When the pandemic hit, it brought with it a combination of early retirement, a mass exit from the workforce and an avalanche of job-changers, a phenomenon that has been referred to alternately as “the great retirement” and “the labor shortage.” Taken together, this led to a lack of productivity.

“Because people were moving from one job to another so regularly, there wasn’t really a chance to bring them up to the speed or productivity that a former employee would have had,” he says. In other words, the outsize churn rate was a key, albeit underestimated, factor in sluggish productivity.

Nevertheless, he is optimistic that the numbers will normalize again this year.

“Productivity is the key out of this mess we’re in,” he says. He characterizes the current environment as one of the constraints: supply chain constraints, labor constraints, and capital constraints. Increased productivity would remove all of these concerns—as well as cost pressures.

“One of the reasons why sluggish productivity hurts the economy is not just because it limits supply; it creates inflationary pressures,” he says. “Think of it this way: A working employee has costs. They have to be paid. This wage is offset by their productivity. What matters to an employer is how much they pay per unit of production. Those are unit labor costs.”

In general, it is difficult to determine how flexible work affects productivity and hence unit labor costs. But “the whole idea of ​​remote work and flexible work is to enable people to be more productive,” says Daco.

Admittedly, that didn’t always go according to plan. Workers used flexible working hours Doing things that make them different had no time to do during the workday – like doing laundry and grocery shopping – or delegate it to someone else – like childcare or caring for the elderly. These are circumstances Dimon and Benioff would point to to argue that telecommuters are less productive because they’re doing chores instead of, well, working.

Now Daco says he’s optimistic that workers and bosses are approaching an equilibrium where all sides are trying to be as efficient as possible to get the job done in the time requested. That would mean a productivity gain, he adds.

Dealing with the trust factor

The problem with flexible work, says Daco, is it Everything comes back to trust.

“Do you trust that your employees will work and produce in the same way as they do in the office?” he asks. “Some executives believe that. Whether it’s more efficient to be in the office depends on a number of factors — your industry, the population you employ.”

But for many office jobsunlike manufacturing jobs, the fact is inescapable: the office is not essential. The work can be done remotely. The question is, he says, is there trust that employees are actually working?

The answer can be crucial. As the labor market cools, job growth slows and the overall economy slows, “this will gradually shift bargaining power back to the employer and away from the worker,” says Daco.

As it stands, Daco said he thinks a hybrid arrangement is likely to stick, but cohorts in the office will come out on top.

“We’re likely to see more emphasis on three to four days in the office than one or two as the job market slows,” he says. “I don’t think it’s necessarily going to be all or nothing.”

That will have big impact on the Fed and monetary policy, he says. “All other things being equal, we will have high inflationary pressures and the Fed will probably be more hawkish.” The rumbling banking crisis underscores the dangers to the economy of a tightening Fed.

Productivity is the missing piece of the puzzle, Daco believes, because it will ease inflationary pressures. “Without that productivity growth, we’re going to see the Fed becoming more hawkish than dovish.”