Decline in worker productivity may be good for economic recovery

workers pouring molten steel in a factory

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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