“Productivity is being able to do things that you were never able to do before,” according to Franz Kafka. By that measure, U.S. businesses seem to be failing at getting their workers to be more productive.
Worker productivity growth — the increase in output per hour worked — has averaged less than 1 percent per year since 2011 (see chart at bottom of story). With the first quarter of 2014, however, it has actually turned negative, with fewer goods and services being produced per hour than in the previous quarter. Employer output per hour, the yardstick for worker productivity, dropped at a 1.7 percent annualized rate in the March quarter.
Bloomberg Businessweek says one of the reasons is U.S. companies aren’t investing in their workers, i.e., helping them do things they “were never able to do before,” by avoiding or delaying spending on things like equipment, software and structures that workers need to increase output.“Whether it’s a computer or a forklift, workers are stuck using outdated machines,” according to Bloomberg Businessweek. “The average age of equipment in the U.S. is 7.4 years, the highest in 20 years, according to the Bureau of Economic Analysis.”
Relative to the output of workers (hours), the equipment, software and structures (capital) workers need to be more productive is not keeping up. The amount of capital per hour worked fell about 1 percent in 2011 and 2012, according to figures from the Bureau of Labor Statistics, and analysts believe the numbers trended the same way in 2013 and early 2014, says Bloomberg Businessweek. The multi-year fall is unprecedented.
Companies do have the cash to spend, of course, with many balance sheets increasing in size and liquidity. But they are choosing to buy back stock or issue dividends to equity holders. And uncertainty about economic conditions is still weighing on business planning, according to the first-quarter Duke University/CFO Business Outlook survey. Sixty-four percent of the CFOs surveyed, as we reported in April, said “economic uncertainty would cause reductions or delays” in hiring plans and capital spending.
Some economists say the unusually harsh winter weather in parts of the United States reduced worker hours in some cases, adding to the drop in productivity. But the slowdown is not just a one-quarter trend, and businesses need to pay attention to the danger signal that slowing worker productivity represents. Said The Wall Street Journal: “In the short-run, less productive workers means slack gets taken up quickly, which could in turn create inflationary pressure and force the Fed to start raising interest rates sooner than expected.”