So You Think Productivity Is Down?

by: Steven Hansen


Headline productivity is down. But what are they measuring?

The basic elements of economic productivity is GDP. So there is no surprise productivity is down.

And using GDP as the metric, the average person is worse off in 1Q2016.

Recently there has been a proliferation of articles attributing the decline of GDP to weak productivity growth. Cause and effect, or more crap from pundits?

The concern of the productivity pundits is that productivity growth has fallen into the toilet...

... and believe the cause of poor productivity is the recent weak investment by the private sector. Consider that investment adds to GDP so we can say that if the private sector really pumped significant money into GDP, GDP would rise.

As an industrial engineer, for me the formula for productivity is very basic.

The problem with an engineer's view of productivity is that although the formula is very simple, the application can very complex. The identification of the inputs vary wildly between locations and businesses. Outputs are relatively easier to identify.

Economists want to measure productivity because they have defined productivity growth as THE dynamic of economic growth. From Wikipedia:

In macroeconomics the approach is different. In macroeconomics one wants to examine an entity of many production processes and the output is obtained by summing up the value-added created in the single processes. This is done in order to avoid the double accounting of intermediate inputs. Value-added is obtained by subtracting the intermediate inputs from the outputs. The most well-known and used measure of value-added is the GDP (Gross Domestic Product). It is widely used as a measure of the economic growth of nations and industries. GDP is the income available for paying capital costs, labor compensation, taxes and profits.

Understand that to an economist - GDP is THE measure of value added.

Productivity by economists' definition is strictly a cost calculation. It does not measure any optimizations for poor business conditions or points of manufacture. Using the economists' definition, productivity would improve by investing in a bridge to nowhere.

Most readers know my disdain for GDP as it does not measure the economic conditions being faced by the median Joe Citizen. I know of no measure which says Joe Citizen is worse off in 1Q2016, yet GDP implies average Joe is worse off.

The problem with economic discussion of productivity is that it is essentially GDP - not technology or measurement or anything that has to do with real productivity. Does anyone care?

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.