Green Room

How much cost-cutting

posted at 1:30 pm on November 5, 2009 by

Non-farm productivity grew an astounding 9.5% in the third quarter, the largest since 2003. How did we get there? It wasn’t just by increasing output — that grew by 4%. The rest came by a 5% cut in the number of hours worked. This meant that unit labor costs fell by 5.2%. Workers made a little more (real wages up 0.2% in the quarter), but there is a great deal of investment happening that is lowering the use of labor. Equipment and software purchases were up in Q3, after cratering in the second half of 2008 and first half of 2009.

Note to Congress: If you make labor more costly relative to capital, you can expect capital to substitute for labor more.

UPDATE: Ed Morrissey asks via email whether this has any portent for unemployment? I think it does. The investment in equipment and software may be either of a deepening or broadening variety. If you are dumping many workers you can also cut your capital budget. But if that category turns around while you are still cutting workers — the ADP projection for private sector payrolls is a loss of 203,000 jobs, above the consensus forecast of -175,000 overall jobs — that would suggest capital deepening. I think this is what’s driving increased productivity. This also means each new worker now comes with a higher “capital budget requirement”, and between that and the payroll taxes contemplated under Pelosicare you probably have a greater drag on employment than otherwise contemplated.

While these data are for the third and tomorrow’s report is for the first month of Q4, I am inclined to think we will see both a number closer to 200k for jobs lost. That might make the unemployment rate 10%.

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