What is the Relationship Between Total Employment and Productivity?

Based on various government and media reports in recent months, we know that economic productivity (output per unit of input) is surging as companies squeeze more effort from smaller workforces. For example, from the Department of Labor's 12/3/09 report:

• Nonfarm business sector labor productivity increased at an 8.1 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics reported today (tables A and 2). This was the largest gain in productivity since the third quarter of 2003, and reflects a 2.9 percent increase in output and a 4.8 percent decline in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.)
  
  
• Manufacturing sector productivity grew 13.4 percent in the third quarter of 2009, as output rose 8.4 percent and hours worked fell 4.4 percent (tables A and 3). The third quarter gain in manufacturing productivity was the largest in the series, which begins in the second quarter of 1987. Over the last four quarters, manufacturing productivity grew 3.0 percent. Manufacturing unit labor costs fell 6.1 percent in the third quarter of
  2009, but rose 3.0 percent over the last four quarters.
  

While improved productivity is nice, the key question is how lean can companies truly operate, or when will employment growth return? We don't have the answer to this question, but came across an interesting article and graph in an 11/16/09 Forbes Magazine article, "Look Who's Hiring Now: Inquire Within". Here's the graph worth a look:

The graph shows that, historically, "total employment" and productivity tend to track each other fairly closely, with the latter recovering slightly prior to employment. However, this time around: productivity zoomed ahead while employment declined. The good news today: as in the past, based on the recent unemployment report, total employment is possibly now forming a base before again growing.

Of course, many people may say "it's different this time", but time will tell. We think the historic relationship bodes well for improved employment trends in the not-so-distant future.

Happy investing,

Jeffrey Walkenhorst
CommonStock$ense

Disclosure: n/a.

© 2009 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer