Does Low Productivity Drive a Tight Labor Market?

Apr 25, 2023 | Macro Insights, No Bull Economics

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Using a labor productivity index in which 2Q47 = 100, we find the latest reading of 18 at the end of 2022 to be telling.

Correlation Between Productivity and Unemployment

  • What we generally find from the chart below is that employers were historically able to push employee productivity (as measured by output per hour) during recessions when those with jobs are willing to go the extra mile to keep from getting axed. As a result, we tend to see higher productivity levels during periods of higher unemployment (like during the 2020 lockdowns). However, these sprints don’t seem to last long and can be followed by periods of productivity underperformance as workers catch their breath.
  • In any case, we can see that productivity has been muted since after the Great Recession, with the index mostly staying at under 40 since 2010 and this may explain the current labor market tightness (more employees are needed to do the same amount of work).
  • Notably, it could also be said that more productive employees can allow for a higher unemployment rate (and lower wages) by enabling employers to generate the same revenue with less staff.
  • We suggest the answer to maximizing productivity is for employers to share revenue with employees through a bonus system. If employees can profit from their own productivity, they are more likely to sustain a hard work ethic.
Employee Productivity Chart
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