May 22, 2024 -
Economy
'It's real': What a top Fed official says drove America's productivity boom
headshot
Neil Irwin
, author of
Axios Macro
In 2023, economic output surged considerably faster than the number of hours Americans worked. A top policymaker attributes the shift to companies acting more aggressively in a tight job market.
The big picture: The open question for 2024 is whether last year's improvement in labor productivity — which allowed inflation to come down alongside strong growth — will continue.
By the numbers: In the first quarter, economic output was 3.2% higher than a year earlier, while the number of hours Americans worked was up only 0.3%. That adds up to a 2.9% gain in labor productivity.
That's better than in any 12-month period between mid-2010 and mid-2019. Productivity gains averaged 1.3% throughout the 2010s.
However, productivity is notoriously volatile and unreliable over short time spans, so it's unclear how much the numbers reflect real, durable changes in the workings of the economy.
What they're saying: 'I do think that it's real,' Federal Reserve Bank president Susan Collins told Axios on the sidelines of the Atlanta Fed's Financial Markets Conference yesterday.
'Other advanced economies are not seeing it. Canada's not seeing it. The euro area's not seeing it. The U.K. is certainly not seeing it.'
State of play: Collins said one source of the improvement appears to be 'sector reallocation,' meaning workers moving from low-productivity industries to higher-productivity ones.
'I also think that there is increased productivity within industries and within firms,' she said. After a period when firms had a hard time hiring, 'it was like a mindset shift in which people thought, 'How are we going to be as efficient and effective as possible with the resources that we have? And what can we do if we're not sure if we can hire?''
'Employers tell me that they identified a number of ways to do things better with fewer workers, some of which they've implemented and some of which they're still implementing. So, I think that level shift is underway, and it's hard to tell how long it will last.'
Moreover, new business formations have been climbing, she notes. 'Typically, when there is a real burst in new firms, that often pushes productivity increases.'
As for artificial intelligence, Collins sees it as a potential future source of productivity rather than something driving economic shifts in the here and now. 'I think that's down the road,' she said. 'I don't think we're seeing that yet.'
The bottom line: 'I think there are a number of hypotheses about what's going on, and it's too early to really parse them out,' Collins said. 'But all of that leads me to believe, because they're pushing in the same direction, it's likely real.'
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