It just may be too much of a good thing. Businesses continue to get more production out their employees.
In its most recent report, the U.S. Bureau of Labor Statistics said labor productivity in the nonfarm business sector rose at a 2.9 percent annual rate. The most recent quarterly increase in productivity came from a 4.2 percent increase in output, while hours work went up only 1.3 percent.
While good for business, worker productivity gains like these keep the labor market from growing, at least in the short run.
The situation facing the U.S. and Idaho economies is known as the productivity paradox. Companies are getting much more output from smaller staffs and are reluctant to hire new workers. This keeps unemployment higher than normal and holds back consumer demand.
The paradox here means that what is good for each company individually is bad for the overall economy. Economists and business owners alike know, however, that in the long run higher productivity pays off.
As with a business, the well-being of any country depends on its ability to produce goods and services. When we are more proficient at what we do, we can live better. Productivity gains, in turn, depend on how much capital we have. Capital includes both physical capital like computers and equipment, and human capital like education and skills.
Since the recession began at the end of 2007, overall business productivity has risen more than 9 percent. Manufacturing productivity is up more than 7 percent.
With higher productivity and weaker demand than what would be true if unemployment were lower, businesses have little reason to hire more workers. Hence the paradox: The economy grows but unemployment stays high.
In December, Idaho’s unemployment rate fell to its lowest level in four years. But personal income is still at 2007 levels, and nonfarm employment in the state is still 34,000 jobs below the peak.
So, should we sacrifice long-run gains in our business profitability or national standard of living to boost employment now? Policymakers may say yes, but few business owners will.
To overcome the productivity paradox, our workers need to get better skills.
In the past, economists have suggested that there is a role for government in promoting and achieving better workforce skills. For this reason, government has long subsidized education at all levels — kindergarten through college.
But increased government spending on education doesn’t ensure a better-prepared workforce. For example, economist Richard Vedder of Ohio University has shown that government support of U.S. colleges and universities makes them less productive and effective at teaching.
Researchers at the Heritage Foundation compared inflation-adjusted, per-pupil government spending on K-12 education with results from the National Assessment of Educational Progress reading examination. Despite a doubling of expenditures over the last four decades, reading scores have remained relatively flat.
So rather than simply increase spending, policymakers need to look for sources of education innovation. Real advances in the skills of our workforce will come from better educational methods.
Businesses will continue to try to get more for less — that is, innovate. Perhaps government can do the same.
Peter R. Crabb, professor of finance and economics at Northwest Nazarene University in Nampa. firstname.lastname@example.org