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Productivity Gains Remain Low Among Job Sectors

Higher Productivity Helps Apartment Markets

By Chuck Ehmann | Wednesday, November 16, 2016

Nonfarm business sector labor productivity among job sectors, as measured by the Bureau of Labor Statistics (BLS), decreased on an annual basis for the previous three quarters and actually turned negative in the second and third quarters of 2016.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all people, including employees, proprietors and unpaid family workers. Productivity growth is measured by dividing the change in output over time by the change in inputs over time.

Higher productivity leads to higher wages and corporate profits as well as an increased standard of living. That will help the apartment market as workers are able to afford a higher class of apartment property.

Since exiting the recession in 2009, annual productivity has averaged about 1.0%, more than a full percentage point below its long-term average. The graph below shows the annual growth in productivity over the past 65 years (blue line). As mentioned above, it has slipped to -0.03% in 3Q16. The long-term average is 2.1%, although the series has been very volatile over time.

Also plotted in the chart is the annual change in seasonally adjusted real Gross Domestic Product (GDP) growth over the same period (red line). GDP growth is one of the key measures of the economy’s health, although our annual change-in-GDP calculation is not the annualized quarterly change methodology the Bureau of Economic Analysis (BEA) uses. Still, annual GDP change tracks rather closely with productivity changes.

There are several theories as to why labor productivity has been weak since the end of the Great Recession:

  • Gains in productivity from technological advancements (i.e. computers, software and the internet) have reached a sort of saturation point and future gains will be more incremental.
  • Mismatch of skills and education of upcoming workforce participants for available positions.
  • Lack of business investment in new information technology, systems and software.
  • Real labor productivity gains are not accurately measured.

Much like labor productivity, GDP growth has been weak since the recession compared to historical norms. Annual growth in GDP has averaged a little less than 2% since 2009, while it has averaged more than 3% since 1948. So far in 2016, annual GDP growth has averaged just 1.5%, less than half the long-term average.

Many economists believe that:

  • Low labor productivity can hurt GDP growth.
  • Low productivity can lead to poor wage growth.
  • In turn, poor wage growth can lead to weaker consumption in the U.S. economy.
  • Poor consumption can negatively affect consumer-related segments of the economy such as retail sales, consumer staples, and consumer discretionary spending.

Job gains have been relatively solid, but the types of jobs created have been predominantly low-paying. This, coupled with lower productivity and wage growth, has been a drag on economic and GDP growth. If these trends continue, we are in for a prolonged period of moderate and unspectacular economic growth.

Chuck Ehmann

Chuck Ehmann

Real Estate Economist

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