Transcript What About Productivity? - Stone & McCarthy Research. SMRA.com

In the Shoes of a Fed Policy-Maker
Federal Reserve Bank of New York
What About Productivity?
Raymond W. Stone
Stone & McCarthy Research Associates
August 16, 2007
What Is Productivity?
Productivity is a measure
of the efficiency of the
labor force.
Productivity is a
function of a variety of
factors including the
skill set of workers
(education), and the
How Do We Measure Productivity?
Productivity is measured in terms of units of output per hour
of labor input
Productivity = Output/Hours
A proxy for productivity might be GDP per Hour
Worked
Productivity Proxy = GDP/Hours
Output Derived From GDP
Hours From The Employment Data
Why Do Policy-Makers Care
About Productivity?
• Productivity Growth in Combination with Labor Force
Growth Determines the Economy’s Trajectory of
“Potential GDP”, the Speed Limit for Economic Growth
• Productivity Growth in Combination with Hourly
Compensation Costs Determines “Unit Labor Costs”, a
Key Factor Underpinning the Prospects for Inflation
• Productivity is a Critical Variable Influencing the Fed’s
Ability to Fulfill the Dual Mandate of Maximum
Sustainable Growth and Price Stability
Productivity and Maximum
Sustainable Growth
The Trajectory of “Potential GDP” is Equal to
the Growth Rate of the Labor Force Plus the
Growth Rate of Productivity
Economic “Speed-Limit”
Why Do We Care About Unit
Labor Costs?
What is Unit Labor Costs (ULC)?
• Definition:
ULC = Labor Cost per Unit of Output
• Measurement:
ULC = (Compensation/Hour)/Productivity
GDP Revisions Rendered Downward Revisions to
Productivity
Current Topics
• Do the Downward Revisions to Productivity
Suggest a Lower Trajectory for Potential
GDP?
• Could Measurement Problems Be Providing
a Distorted Productivity Picture?
• What is the Role of Demographics on
Potential GDP?
Has the “Speed-Limit” Changed With Productivity Revisions: Policy
Implications
Productivity Measures Only As Good as Output and Hours :
The Case of the Missing Hours
The Role of the Unauthorized or Illegal Worker
Did This Really Happen To Construction
Productivity?
Excluding Construction Has Productivity Really
Slowed?
Might An Aging Labor Force Slow the Trajectory
of Potential GDP?