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HICKS: Productivity gains make for jobless recovery

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Mike Hicks

So it has come to pass that the U.S. economy has surpassed pre-recession levels.

In the fourth quarter of 2010, the gross domestic product (the value of all goods and services we produce) topped the last record high, reached in the second quarter of 2008.

This is good news, of course, but there is a tarnished silver lining to that cloud. We have broken record levels of production with almost 7 million fewer folks working. How can that possibly be? There are two explanations, but I begin by providing an example.

Imagine a factory shift, or a restaurant crew, of 21 workers. If one person gets ill or quits, the crew will manage without them. The better the worker, the harder it is to fill that gap. If the absent person is a bad worker, maybe the shift goes easier without him. Something like this is what has happened in this recession. About one in 20 workers has lost his job. How can we produce more with fewer workers?

Our economy has seen remarkable productivity growth since the start of the recession. As in our factory floor example, each worker gets a bit better at his job, so the same level of economic activity is produced with fewer workers. The data point pretty strongly to this as a cause. At the end of last year, each American worker was producing about 5 percent more goods or services than he was producing in mid-year 2008, when output last peaked. That is due to better-managed operations, better workers and better use of technological improvements.

The second reason for the higher productivity is that the pre-recession years saw a bubble not only in housing markets, but also in labor markets. As a consequence of this, many weak or mediocre firms were buoyed by the artificially high level of demand for goods and services. A dual consequence was that all workers in poor firms and poor workers in good firms were employed at a time they should have lost their jobs. So, the bubble kept workers in jobs that were not viable in the long term.

Had market signals prevailed, workers in weak companies or with outdated skills would have been forced to retrain or relocate slowly over several years. This would have boosted the unemployment rate in 2004-2007 a tad, but would still have been far less disruptive than the bursting of a bubble we saw in 2008.

Both explanations are partly true, and how much of each is a matter for scholarly speculation. The problem is, we now have 7 million people that businesses really don’t need. Some of this will change in the coming months, but the harsh reality is that technological change has rendered a good many of these folks redundant.

It is an old story, but a nevertheless disheartening one. It is also a tale rich in its implications for young workers. About 6 million of those currently unemployed, about 85 percent, have only a high school degree or less.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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  • President of Express Employment - Indy South
    Mike - your article was right on. I wrote an article on our website a couple months ago called "The New Normal" We are also seeing a miss match in what employers need and the candidate pool. There are good people available but employers are being very specific with what they want and many lack the skills needed - not bad people, just employers are asking for more in this economy. We are also seeing employers not willing to take risks on those applicants that have more skill than they need and were highly compensated during the "bubble" - afraid that they wont stay. Employers are cautious and are not willing to hire with out a very good match.

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  1. Those of you yelling to deport them all should at least understand that the law allows minors (if not from a bordering country) to argue for asylum. If you don't like the law, you can petition Congress to change it. But you can't blindly scream that they all need to be deported now, unless you want your government to just decide which laws to follow and which to ignore.

  2. 52,000 children in a country with a population of nearly 300 million is decimal dust or a nano-amount of people that can be easily absorbed. In addition, the flow of children from central American countries is decreasing. BL - the country can easily absorb these children while at the same time trying to discourage more children from coming. There is tension between economic concerns and the values of Judeo-Christian believers. But, I cannot see how the economic argument can stand up against the values of the believers, which most people in this country espouse (but perhaps don't practice). The Governor, who is an alleged religious man and a family man, seems to favor the economic argument; I do not see how his position is tenable under the circumstances. Yes, this is a complicated situation made worse by politics but....these are helpless children without parents and many want to simply "ship" them back to who knows where. Where are our Hoosier hearts? I thought the term Hoosier was synonymous with hospitable.

  3. Illegal aliens. Not undocumented workers (too young anyway). I note that this article never uses the word illegal and calls them immigrants. Being married to a naturalized citizen, these people are criminals and need to be deported as soon as humanly possible. The border needs to be closed NOW.

  4. Send them back NOW.

  5. deport now

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