America's labour productivity is soaring, but its labour market is stagnant. The economy-"new" or otherwise-is working well below its full potential
WHEN Alan Greenspan hailed America's productivity miracle in the late 1990s, it raised the happy prospect of growth without inflation. On Thursday August 7th, the Bureau of Labour Statistics offered the latest evidence of America' s productivity revival: output per worker soared by 5.7% in the second quarter, at an annualised rate. Miraculous? Maybe. But the figure has raised the unhappy prospect of growth without job creation.
When productivity grows, the economy is able to produce more with the same number of workers. This raises the potential output of a fully employed economy. Unfortunately, the economy does not always live up to its potential. Surprisingly strong figures for GDP last quarter and for services last month, not to mention rising yields in the bond market, had raised hopes that the economy was returning to form and beginning to punch its weight. But the latest productivity figures show that it is still performing well within itself. There may be more slack in the economy that many commentators, and certainly many bond-market investors, had thought.
If that is true, it may be bad news for the labour market. Higher productivity means that firms can make more stuff without hiring more workers to do it, or the same amount of stuff with fewer workers. Back in the 1960s, Arthur Okun, an American economist, showed that employment would fall, even if the economy were growing, if an "output gap" opens up between actual output and the economy's long-term "potential" output. Okun's razor appears to be at work in the American economy today, shaving payrolls in the non-farm sector by 44,000 in July.
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Quis custodiet istos custodes? (Who will watch the watchers?)
-- Juvenal's Satires, circa 110 AD