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Monday, November 09, 2009

Productivity and the Employment Situation

When I read the productivity report for the third quarter (July through September) on Thursday, November 5, I knew we would see a disappointing employment report for October on Friday, November 6.

Productivity rose at an annual rate of 9.5% in the third quarter. And output did not rise nearly that fast. It's clear that when productivity rises more rapidly than output, employment will fall. And if output does not rise sufficiently faster than productivity growth, employment will rise very slowly.

Now, productivity growth can change a lot from one quarter to the next, and the correlation between this quarter's productivity growth and last quarter's productivity growth is what one might call modest (0.018, which is not significant at any conventional level of significance). Nonetheless it does suggest that a higher rate of productivity growth last quarter does not suggest a slower rate this quarter.

The productivity growth that occurred in the third quarter is hardly bad news. But, assuming productivity growth did not suddenly slow down in October, and that output growth did not suddenly accelerate, then, we were likely to be facing an employment decline. And decline employment did. If you want the gruesome details, they are here.


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