The Colorado Springs Gazette final

Explaining lower productivity amid higher wages, how it affects the economy

U.s. DEPARTMENT OF LABOR And WELLS FARGO ECONOMICS Tatiana Bailey, Ph.d., director of the UCCS Economic Forum, will hold her annual signature presentation at the Ent Center from 1:30–4:30 p.m. Sept. 1. Registration is open at uccseconomicforum.com.

This past week, some lesser-known yet very important data were released. Worker productivity for the second quarter of this year was released by the Department of Labor as was the small-business survey, which is conducted by the National Federation of Independent Businesses.

Recent data from both entities present dilemmas for the Federal Reserve in its interest rate decisions. The data also point to storm clouds for the economy.

First, second-quarter worker productivity declined at a 4.6% annualized rate; that is on the heels of a decline in the first quarter. Productivity is a function of hours worked and business output, and it’s important to remember that productivity can fluctuate quarter to quarter, so most of the time analysts don’t read too much into it. However, the trend over the past year is negative productivity growth and that is worrisome.

Most obviously, lower worker productivity means lower U.S. productivity and global competitiveness, which is not desirable.

Another consideration is that the Federal Reserve is trying to weed through the conflicting economic data to make good decisions about interest rate hikes, which we are in the midst of because of whitehot inflation. The June index was up 9.1% year-over-year; July figures released last week showed inflation slowing to a stillhigh 8.5%.

Which brings me to the data released from the small-business survey. It continues to show that employers are still having a tough time with the tight labor market. Forty-nine percent reported job openings they could not fill, 48% have raised compensation for their workers and 25% plan to raise compensation in the next three months.

And here’s the dilemma for the Fed. If businesses are having to pay more for labor, but worker productivity and therefore output is down, businesses are having to pay labor more to produce less. Eventually, employers might have to hold

off on expansion plans, cool off on hiring, and maybe even lay off workers. All of the above stymie economic growth and GDP potential.

To be fair, we’ve had a lot of churn in the labor force with many people quitting jobs and starting new ones. In fact, in July we had 528,000 jobs created, which is fantastic. But it does take time for new workers to get settled and reach their productivity potential.

So, there’s a decent chance productivity will improve. The question is whether it will be fast enough such that we can avoid that wageprice spiral where businesses keep increasing the price of their goods to pay workers what it takes to hire and retain them. Clearly, that scenario is inflationary and supports the continued need for aggressive rate hikes.

But in a world of labor shortages, wage increases and stagnant or falling productivity, it’s not clear that higher interest rates will fully do the job of reducing prices back to the “stable prices,” which the Fed considers to be around 2%. That’s the conundrum for the Fed as well as the economy at large.

BUSINESS

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2022-08-14T07:00:00.0000000Z

2022-08-14T07:00:00.0000000Z

https://daily.gazette.com/article/282510072348364

The Gazette, Colorado Springs