Business Insider

Peter Crabb: Why joblessness will persist as the economy starts to recover

We are all trying to get by with less these days. Some companies are finding it easy to do.

The U.S. Bureau of Labor Statistics reported that productivity at nonfarm businesses, or output per hour of work, rose at 6.6 percent in the second quarter of this year. That’s the highest rate of increase in nearly six years and well above economists’ expectations.

Even though output was down 1.5 percent, hours worked were down 7.6 percent. Companies may not be producing much during this recession, but what is produced is done more efficiently.

Increases in worker productivity like this are key to raising living standards in the long run. But as companies keep output up today, while continuously slashing jobs, the short run impact is higher unemployment.

Incomes in the United States have doubled about every 35 years. We have a much better standard of living than our parents and grandparents. The reason is increased productivity. An hour of work today produces more goods and services than it used to because we have more capital equipment to work with, like computers, and have improved many production processes, such just-in-time inventory management.

However, gains in productivity that are good for us tomorrow can hurt today. The unemployment rate in the United States stood at 9.4 percent Thursday and is likely remain high until next year.

Automatic Data Processing Inc,), a payroll services firm, announced this week that job losses continue. Jobs in the service sector fell 146,000 in August, while manufacturing employment fell by 152,000. On the bright side, the total loss of 298,000 jobs in August was better than July's 360,000 drop.

Despite a bleak labor picture overall, employment conditions vary greatly.

National Public Radio reported this week on large job gains in education and health care. When the recovery gets going, better jobs will return to all sectors, but these areas are growing now.

Business sectors that saw good job growth before the recession, like manufacturing and construction, are unlikely to see much, if any, new job growth in the coming years. Manufacturing is achieving higher productivity with fewer workers, and demand for new homes is clearly low.

As we look for good news on the economy, we cannot expect good news on employment until well after the recovery is under way. This is known as Okun’s Law.

Arthur Okun, an economic adviser to President Lyndon Johnson, is known for the observation that output grows relatively more rapidly than employment as an economy begins to recover from a recession. This effect is due to the fact that during an economic downturn, production and front-line service employees are laid off more often than back-office workers and supervisors.

As evident in the productivity data this week, fewer workers are producing proportionally more goods and services. Layoff announcements are slowing, but gains in the ADP and other payroll reports are unlikely occur for some time.

While we all learn to get by with less, workers will need to retrain and refocus, looking to industries where jobs are more plentiful.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.