What a drop in productivity tells us about the economy

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Productivity, in an economic sense, is declining. During the first months of the year, it fell by 7.5% — the largest decline since 1947.

To establish productivity, economists look at all the things made, all the goods and services produced in the economy in a given quarter, and the number of hours they took to produce.

According to Sarah House, senior economist at Wells Fargo, high productivity means workers are making more money and companies are making more money, “but in the first quarter output actually fell while hours worked skyrocketed,” she said.

Several things could explain this, said Erica Groshen, senior economics adviser at the Cornell University School of Industrial and Labor Relations.

“There’s been a lot of hiring,” Groshen said. Lots of vacancies too and new workers who don’t do the same.

There is also the supply chain crisis. Contributions are slow to arrive. Workers sat idly most of the time waiting. Additionally, omicron is considered, according to labor economist Aaron Sojourner of the University of Minnesota.

“You know, we’ve seen millions of Americans miss work, either because they were sick or because they had to care for family members who were sick,” Sojourner said.

And the loss of productivity will not contribute to the rise in consumer prices. “Productivity is an escape route for inflation,” House said. When productivity is high, companies may be able to meet higher costs without raising prices. Instead, she said, the companies passed those costs on to us.

The good news? Labor productivity data tends to be quite volatile. Thus, a bad quarter does not necessarily create a long-term trend.

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