#764 - Open Source of Freedom - The Productivity Paradox.

U.S. Bureau of Labor Statistics: Business sector: Productivity, hourly compensation, unit labor costs, and prices, seasonally adjusted
x	Output per Hours of all Persons	Hourly Compensation
2001 Q1	100	100
2003 Q3	112.4	107.1

"Hourly compensation is current dollar compensation divided by hours worked in a given sector. Real hourly compensation is hourly compensation divided by a consumer price series, so that it reflects changes in real purchasing power. Compensation includes wages and salaries, supplements, employer contributions to employee benefit plans, and taxes. Thus it is a broader concept than disposable income. Both compensation and disposable income are published by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce in the Survey of Current Business. If you have questions about the relationship between disposable income and compensation you should direct them to..."

The question is who consumes the 5.3% increase in production. Not the employee. How many more cars can drive the owners of capital?

Because we know that in recent history the non disposable part of the income was increasing faster than the rest of the salary the real gap between suplly and demand has been growing faster than these numbers suggest:

"Benefit costs incurred by private employers have grown rapidly in recent years. For example, according to the Employment Cost Index (ECI), benefit costs rose more than 11 percent, compared to wage and salary increases of about 6 percent, between September 2001 and September 2003. The main sources of this increase are health insurance costs, which rose more than 20 percent over that period (despite some efforts of employers to shift those costs back to employees) and pension costs, particularly the costs of funding defined-benefit pension plans."

You see that the increase of productivity is in fact a over-production that creates unemployment and deflation.

The 300.000 increase in payroll that we have witnessed these last few months is about the number of jobs that have been displaced by calling the army reserve to duty.

Cheap credit is definitely a factor of productivity. It makes easier investment in productivity: we saw it in Japan, we are seeing it in the USA:

"If manufacturing output has not declined in the United States, then what explains the sharp reductions in U.S. manufacturing employment that have occurred not only in the past few years but over preceding decades as well? The answer is a stellar record of productivity growth. Over the years, new technologies, processes, and products have permitted manufacturing firms to produce ever-increasing output with ever fewer workers.¹² The long-run trend in manufacturing is similar to what occurred earlier in agriculture: At one time a majority of the U.S. population lived on farms; but agricultural productivity has improved so much that although farm workers are only 2-1/2 percent of the workforce, they are able both to feed the nation and export substantial quantities of food as well.

This observation brings me to my fifth and final possible explanation of the jobless recovery, which is the remarkable increase in labor productivity we have seen in recent years, not only in manufacturing but in the economy as a whole. Since the trough of the recession in the fourth quarter of 2001, productivity in the nonfarm business sector has risen at an annual average rate of 4-1/2 percent, compared with average annual increases of 2-1/2 percent in the late 1990s, itself a period of strong productivity growth. This surprising productivity performance probably reflects both some increase in the long-run rate of productivity growth as well as unmeasured increases in the work effort of employees. However, in my view, neither of these factors can fully account for the increase in productivity growth, particularly some of the recent quarterly numbers. I suspect that some of the recent expansion in productivity is instead the delayed result of firms' heavy investment in high-technology equipment in the latter part of the 1990s. Only over time have managers learned how to reorganize their production and distribution so as to take full advantage of these new technologies and thus enhance the productivity of capital and workers.

Strong productivity growth provides major benefits to the economy in the longer term, including higher real incomes and more efficient and competitive industries. But in the past couple of years, given erratic growth in final demand, it has also enabled firms to meet the demand for their output without hiring new workers. Thus, in the short run, productivity gains, coupled with growth in aggregate demand that has been insufficient to match the expansion in aggregate supply, have contributed to the slowness of the recovery of the labor market. Although other explanations for the jobless recovery--overstaffing in the boom, benefits costs, uncertainty, and structural change--have played a role, in my view the productivity explanation is, quantitatively, probably the most important. As we will see, that conclusion (if correct) bodes well (?) for the future."

"My conclusions therefore are relatively optimistic. The combination of faster growth in demand and slowing productivity growth should lead, in the next few quarters, to increased hiring. At the same time, inflation appears subdued and likely to remain so. Thus it appears that monetary policy can remain accommodative, supporting the economic recovery and the recovery of the labor market, without endangering price stability."

As long as the distribution of income is not geared in a way that makes the disposable income of the employee grow in sync with his output the system is condemned to have internal instability.

It is one of the many aspects that proves that in a credit based economy individual interest and social goals are not compatible.

Productivity which seems to profit the individual is, in a credit based economy, a social disease. It means dimishing the cost, which is the revenues of the people with less bargaining power and increasing the profit, the revenues of people with higher bargaining power.

This quantity which in thermodynamics is liken to the temperature of a liquid, because of credit, grows wether there is economic growth or recession.

When this quantity growths the return on any productive economic activity goes down, be it work or investment.

In the end the system is vaporised and the Economy falls in Keyne's Liquidity Trap it is the unavoidable recession.

Keynes Liquidity Trap is the moment the return of investment gets below the markets expectation of the implied interest risk linked to it.

In a credit based environement although all cost could theoretically go down to zero this constitutes the sticky part of any productive venture no matter how high the deflation gets.

Falling into the Liquidity Trap is not a linear process you are in the Liquidity Trap or you are not.

Imagine water, the temperature goes up but it is still water. Then it comes to boiling point. The minute the temperature is above boiling point all the water is vapor. There is no more Liquidity no more thermal exchanges between the atoms of water.

Then, in order to bring it back to a liquid state you need to get the water very cold it can take a long time, longer then you will live.

The only way you can avoid that vaporisation is by keeping the temperature at a stable level.