There is a somewhat surprising surge in labour productivity going on in the US economy. It is one of the most important indicators of an economy, but this time, it’s surprising surge might actually mean something not so good..

First, the figures:

• U.S. businesses boosted their productivity strongly in the second quarter but it was at the expense of weakening labor market, government reports on Thursday showed.
• The Labor Department said business productivity surged at a revised 4.3% annual rate, nearly double the 2.2% gain previously reported and well ahead of forecasts for a 3.5% increase.

Labour productivity matters more than almost any other single statistic. It’s the only way that people on average can become better off. This is the only permanent way an economy can become richer. Consider the alternatives:

1. Working longer, the US worker already ‘enjoys’ the longest working week of the developed world
2. Increasing the workforce, this helps the economy, but not individual workers
3. Constantly improving the terms of trade, that is revaluating the currency vis-à-vis other currencies so that we can buy ever more abroad. If anything, the dollar has been going down and one can easily grasp that this is also no long-term solution

All rich nations got rich by structurally improving labour productivity, it’s as simple as that (how they did it is another matter, of course, perhaps topic for another day)

If labour becomes more productive (that is, produces more per hour), it can also enjoy an increase in wages without this leading to wage inflation.

A business can pay it’s employees 4.3% higher wages if they’ve become 4.3% more productive, it’s that simple. Over time, these improvements accumulate, and lead to big improvements of living standards over generations, or so they could

The problem is that these figures are average figures, they don’t tell you anything about distribution. Working people might very well become more productive year over year without seeing their living standard improved if that increase in productivity goes to corporate profits and/or salaried people (or it could go to taxes and public spending).

Now, one thing we have to say that it is surprising to see such jumps in productivity at this stage of the business cycle (the low, basically). Why? Demand for output is diminishing, so business do need less labour, but often there are some barriers to shedding labour immediately. These barriers could be

1. Legal, like in Europe, where business has to have good grounds to let people go
2. Cultural, like in Japan, where the company is still mainly seen as a sort of community that needs to be held together
3. Uncertainty, it might just be a short-term fall in demand, people will have to be rehired if demand picks up and this can be a costly process, more costly than keeping them on the payrolls.

In the US, there are little ‘European like’ restrictions on firing, it’s basically a ‘hire-and-fire’ type of economy. Companies are run for the purpose of shareholders or management, not employees (there are a few exceptions, but these are not easy to maintain because of the alien institutional environment).

So, when businesses feel demand for their products and services is going down, they have few restrictions (legal or cultural) to respond by cutting back their labour force but for business calculation. Apparently, a conclusion forces itself upon us that US businesses do not see an early upturn in demand. That’s not good news.

So here we have a figure which has a great headline showing, but it’s deeper meaning isn’t so positive.