A decline in worker productivity after several quarters of gains could be a sign that employees are maxed out and companies need to start hiring. Think Stock photo.

A drop in worker productivity for the first time in 18 months is actually good news for the struggling U.S. economy and high unemployment rate. Companies that slashed payrolls during the recession have been raking in profits by getting more output from fewer workers. But the latest report from the Labor Department on worker productivity may indicate that employees have reached their limit. If that is the case, U.S. companies will have to engage in job creation to maintain growth and boost the flagging economic recovery.

Worker productivity in an upside down economy

Worker productivity declined at an annual rate of 0.9 percent in the April-to-June quarter after posting large gains throughout 2009, the Labor Department said Tuesday. The Associated Press reports that U.S. worker productivity is the key ingredient to boosting living standards. It allows companies to pay workers more because of increased production without raising the cost of goods. In most cases a slip in productivity would be a troubling sign for the U.S. economy. But economists believe the unemployment rate has become a threat to the companies that are slashing their work forces. If they start hiring, the job creation will give households the income boost they need to increase consumer spending, which accounts for 70 percent of economic activity. And that would ultimately lead to more demand for those companies’ products.

Workers sacrificed for corporate earnings

For companies that may have believed the U.S. had entered a period where output could keep climbing without bringing people back to work, CNN reports that the latest worker productivity numbers are a dose of reality. Companies did more with less during the worst of the recession. But in the latest Labor Department report, the amount of hours worked rose at a faster pace than actual economic output. Nariman Behravesh of IHS Global Insight in Lexington, Mass., told CNN that companies probably “overdid it” with layoffs during the recession. He said that if for no other reason than keeping employee morale up, companies may have to hire more to avoid worker burnout.

Job creation needed to thwart deflation

Job creation is likely to remain weak for the next few months, Behravesh told CNN. But he’s optimistic that the private sector may be adding more than 100,000 jobs a month by the end of this year and 150,000 jobs a month by the middle of 2011. But ABC News reports that weak productivity is in line with other signs that U.S. economic recovery is losing momentum. The overall economy grew at only a 2.4 percent annual rate in the second quarter, down from a 3.7 percent rate in the first quarter. Some Federal Reserve officials worry that with the unemployment rate stuck at 9.5 percent, employers will seize the chance to push wages down for those still working and prices will follow suit, possibly triggering a vicious cycle of deflation.

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Just when We thought it was Over

While many people who have been hit hard by the recession are thrilled to hear that it is coming to a close and believe that they will finally be able to earn some much needed money now, this may not actually be the case. Most of us would not expect that the end of a recession would include more tough times, but the truth is that in this case it likely will for many people. A recent Associated Press article speculates that people who are out of work or hoping to make more money will be apt to run into more employment difficulties, possibly for as long as another decade. The best case scenario is thought to be a 5 year wait for the unemployment levels to return to where they normally are.

So where do We Currently Stand?

With 7 million jobs that have been completely eliminated, the unemployment rate currently stands at a dismal 10 percent. This means that there are approximately 15.4 million people who are out of work and in desperate need of some money now. This does not even factor in the additional hardship caused by people who have had to take on lower paying jobs or have taken a cut in pay to keep their job. Also with the cost of living on the rise, people have been hit even harder.

Why will it Take so Long?

Adding jobs back in will take time. The economy is picking up, but it is moving along slowly and employers will tend to be cautious about taking on more people or giving raises until things have really improved. Add to this slow progression the fact that there will be huge numbers of job seekers in the market, all competing for the limited positions, including some retirement-aged people who will choose to work longer to help ensure their security. Sadly, the recession came just after a period of time where relatively few new jobs were created, making the unemployment situation even more precarious.

What do the Experts Think?

According to the article, economist David Levy believes that the next decade will see unemployment at around 8 percent and that average wages will drop. These issues will result in people having more trouble paying off money that they owe. The experts tend to believe that the improvement will be very slow and painful. The optimists in the group tend to be of the opinion that many of the jobs will be back in place by the middle of the decade, but that so many more people will decide to get back into the job market, that the unemployment rate will stay high because there will be more people than jobs.

Where do We Go from Here?

The country, its citizens and its companies have been hit extremely hard by this recession. Healing will take a great deal of time. If you are one of the many who is seeking a way to earn some money now you will likely have to think out of the box. Taking freelancing or odd jobs can often help bring in some cash until a regular job comes along.

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