Thursday, January 13, 2011

U.S. Productivity Exceptionalism?

Nick Rowe at the Worthwhile Canadian Initiative notes that the U.S. has suffered the second smallest drop in GDP among G7 countries, yet also suffered the biggest drop in employment and asks why that happened.

One part is simply statistical discrepancy. In Q1 2007, gross domestic income was 1% bigger than GDP, now it is 1.3% smaller. In theory they should be exactly equal as they are simply two aspects of the same real world phenomenon , but they aren't because they come from different data sources. As the income numbers are largely derived from employment numbers, this explains more than 2 percentage points of the apparent "high productivity growth".

Note that the statistical discrepancy explanation holds regardless of whether you think the GDP number has underestimated the depth of the recession or whether the income and employment numbers have exaggerated the depth of the recession, or a combination of the two (I for one thinks it is a combination, but that the weaker employment/income numbers come closer to the truth). In any event, they mean that productivity increased less than the GDP to employment numbers at first glance suggests. 

Still, even after correcting for this, productivity in the U.S. has increased a lot more than elsewhere.

One part could be that the U.S. has experienced more sticky wages mainly due to more "generous" unemployment benefits, something which in particular has depressed low productive employment. These more sticky nominal wages combined with lower inflation have boosted real wages and productivity at the expense of employment.

Meanwhile, other countries have had more flexible real wages and Germany in particular has adopted policies which has limited job losses, such as lower unemployment benefits and incentives for employers to reduce working hours instead of the number of employees when demand drop.