• "God invented war so Americans could learn geography" -- Mark Twain.

Wednesday, September 2, 2009

Surf's Up in the Economy!

The News:
"U.S. companies cut more jobs than forecast in August and boosted their workers’ productivity the most since 2003 in the second quarter, signaling employers are seeking to cut costs further even as the economy stabilizes." (Bloomberg)

The Note: This like saying, "Hey! Surf's up!" as hurrican Jimena rages swirling destruction on Baja.

We've always wondered what "productivity" meant. Like most people and, indeed, like most econ textbooks, we've thought of productivity in terms of efficiency: widgets cranked out per hour. Indeed, "productivity qua efficiency" is a standard Capitalist Mantra -- the "build a better mouse trap" saw. The notion foisted is that a "vibrant free market economy" will replace inefficient home spinning wheels (which take six months of gyrations to come up with a wool blanket) with moden mechanical robo-looms (which can turn out a ton of blankets in six hours. ) This is why capitalism is such a magical and wonderful thing.

But how is this productivity actually measured? Does the US Bureau of Labor Statistics send out inspectors with stop watches to time and measure the nut-tightening prowess of a robo-arm and compare it with Charlie Chaplin's frantic efforts taken as a sort of "base line" ? That would measure efficiency, no doubt, but, given the size and complexity of our economy it would be extremely labor intensive and time consuming to conduct such studies on a quarterly basis. Is this the way productivity is really measured? Nooooo. The US Bureau of Labor Statistics puts it this way:

"Productivity is a measure of economic efficiency which shows how effectively economic inputs are converted into output.

"Output per hour of all persons—labor productivity—is the most commonly used productivity measure. Labor is an easily-identified input to virtually every production process.

"Unit labor costs are calculated by dividing total labor compensation by real output or —- equivalently —— by dividing hourly compensation by productivity.

"That is, unit labor costs = total labor compensation / real output ...,

"Thus, increases in productivity lower unit labor costs while increases in hourly compensation raise them."
In other words "productivity" which started out as having something to do with "efficiency" ends up having everything to do with "costs" -- and in particular "labor costs" -- or "worker compensation" as in dollars per hour or retirement and health care benefits.

Sooooo... the headlines really read

Rejoice sucker.

For more accurate measurements and nuances see Statistics Canada