What the Revised Productivity Rate Will Mean

Productivity growth is the elixir that makes an economy flourish. Best described as output per worker, productivity grows when workers harness innovation, machinery, experience, and their own skills to produce more in less time. When that happens, historically, society prospers. Workers get paid more because companies are generating more cash and lowering expenses; governments raise more tax revenues because citizens and corporations are more prosperous, and more money is available for the research and education that will nurture the next round of productivity. The so-called productivity miracle of 1997-2003, which was boosted by heavy spending on technology, fostered rapid growth, decent wages, and low inflation.

The crucial role productivity plays makes recent news all the more alarming. Worker output actually fell in the first two quarters of 2011, the first back-to-back decline since 2008, according to the Labor Dept. Just as worrisome, the productivity gains that often occur at this stage of a recovery are far more anemic than originally estimated, and Labor Dept. economists have revised the data from 2007 to the present downward. Worker output per hour rose at a 2 percent annualized pace between the fourth quarter of 2007, when the recession began, and the first three months of 2011, according to the DOL revisions. The original estimate was 2.7 percent. Productivity for the foreseeable future will advance between 2 and 1.5 percent, well under the 3.4 percent pace set during the halcyon days of 1997 to 2003, say economists at the Federal Reserve Bank of New York.