Jobs

Why Productivity Growth Is Bad For The Unemployed

Productivity growth means U.S. businesses are getting more efficient, wringing more value from each hour of labor. But the flip side is that companies don't need so many workers, leaving more people out of work.

So it makes sense that last year's surge in productivity may be tied to a larger-than-expected rise in unemployment.

A rule called Okun's law says there should be a one percent rise in the unemployment rate for every two percent that GDP growth falls below its usual trend. But that didn't hold true last year, according to a new paper from the San Francisco Fed.

Okun's law would have predicted a 1.5 percent increase in the unemployment rate last year. But the increase was actually 3 percent. The paper looks at different possible reasons for this, and concludes that productivity growth was the "main driver." The authors write:

The surge in labor productivity allowed employers to keep output steady while shedding workers and reducing hours of work in the economy. As such, it allowed unemployment to rise much more than expected given the change in GDP, breaking the normal pattern between the two measures observed over the past 60 years. ... If productivity keeps on growing at an above-average pace, then unemployment forecasts based on Okun's law could continue to be overly optimistic.

For more on this theme, revisit the warning we heard last fall from an economist: "the link between the macroeconomy and the labor market has been broken. The bottom line — the economy is looking better on paper but not for workers."

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