The current U.S. cycle, in contrast to many developed countries, has been categorized by rapid growth in productivity (measured as output per worker). During the recession, the decline in U.S. employment was far more severe than in Europe or Japan, but the downturn in output was relatively shallow. The implication is that there was only a very mild dip in U.S. productivity, according to economics research conducted by Barclays Capital.
The recovery phase of the cycle has played out rather differently in the U.S. as well, with nearly all of the rebound reflecting gains in output per worker. Indeed, as of Q3 2011, while the decline in real GDP had been fully reversed, the level of employment remained nearly 5 percent below its pre-recession peak.
What explains this? According to Barclays Capital, there are cyclical and structural components.
Short-term movements in productivity (over the course of a cycle, say) are best thought of as reflecting the relative shifts in output and employment and, in particular, how firms adjust their labor resources in response to changes in demand. During a downturn the degree of labor market flexibility plays a role in how much firms can trim their payrolls, and is likely to explain some of the difference in the recent productivity experience in the U.S. and continental Europe, where firms face greater barriers to rapidly shedding labor.
The rebound in corporate profits since the recession’s end underscores the point (as of Q3 2011 they stood 19.4 percent above the pre-recession peak). This compares favorably with many postwar cycles, despite the relatively tame rebound in output.
The mild dip is U.S. productivity reflects flexibility in labor markets and the decision by U.S. firms to aggressively shed rather than hoard labor resources in response to the cyclical decline in demand.
It also points to a structural adjustment. The sharp decline in productivity partly reflected a transition to a higher level of structural unemployment not just a cyclical, or temporary, loss of demand, Barclays Capital reports.
Takeaways
Productivity fell less during the recession in the U.S. than elsewhere, and rebounded much more sharply in the early phase of recovery.
The flexibility of the U.S. labor market was one reason.
An apparent decision to shed, rather than hoard, labor resources was another factor.
Source: Barclays Capital