Saturday, August 15, 2009

U.S. Productivity rises in Q2?

Last week, the Labor Department announced that the amount of output per hour of work rose by an annual rate of 6.4% in the 2Q while labor costs dropped by 5.8%. According to many economists, this is viewed as a healthy increase in productivity because "it means companies can pay their workers more with the wage increases financed by rising output."

Huh? Obviously, our esteemed economists have learned little from what has happened to the U.S. and Global economies over these past two years. I wonder how anyone could surmise that this "improvement in productivity" means that companies can pay workers more when it clearly states from this Labor Department data that labor costs have dropped by 5.8%.

Looking at the economic environment outside of the banality of the logic of economists, jobs are harder to find, which means that companies don't have to pay as much to hire a worker than as before. With workers having less discretionary income as a function of lower wages, consumers are spending less, which has a negative multiplier impact on the economy. How this can be classified as an environment of rising productivity can only make sense to an economist living in an ivory tower.

Truth be told, productivity will rise when companies manufacture products within a local jurisdiction, enabling a positive multipler effect to occur. Higher wages are offered, consumers have more discretionary income, which means that they go out to dinner more, buy more items, get more haircuts, and so on. This generates wealth and growth within an area that creates real productivity.

It's bad enough that our economists supported this faux definition of productivity in the first place, but what's worse is that we didn't learn from its effect. When will we learn that productivity is derived from more production, not less spending?

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