Labor productivity and the future of the CT economy

Mining our meager labor productivity performance.

AE Rodriguez , Divya Gade http://www.theleastexplanation.com
08-21-2019

If we hear the phrase “inverted yield-curve” on more time we’ll puke; that’s how we feel and I know we are not alone in this sentiment. For the chorus of chicken-littles the incessant yield curve-glumonomics betrays what can almost be considered a “yearning” for the much-heralded recession. But sentiment aside we are always searching for clues, we suppose. Here we take a look at some less-common indicators that may provide some perspective on Connecticut’s prospects.
State labor productivity performance is known to offer some insights into a number of things. It has something to say about our economic performance both in terms of our own past performance and relative to our neighbors – or competitors, as the case might be. A close look at the behavior of the components of productivity provides some idea as to the prospects and the nature of a future downturn by examining how the components behaved during the last downturn. Let’s take a comparative look first. Here is Connecticut relative to our neighbor-cum-competitor to the north, Massachusetts, and relative to the Northeast.

Figure 1

CT is not only underperforming relative to its peak in the first quarter of 2009 but is being clobbered by Massachusetts and the Northeast states generally. The data in figure 1 is US Bureau of Labor Statistics from 2007:Q1 to 2017:Q1.

One wonders whether things have improved for us here in CT with more recent data. Let’s take a look with more recent data. Figure 2 displays our performance from the first quarter of 2007 to the first quarter of 2019.

Figure 2

The answer is: apparently not – we have not yet returned to our prerecession high- even after 10 years. The downwards sloping blue line running across is the trend line; the red dashed line at the top is the pre-recession high. Ten years later and we are still trying to dig ourselves out of this mess. Why our poor performance? Could be a lot of reasons. But one thing is certain. Most of the legislation coming out of Hartford lately has been largely redistributive rather than productivity enhancing. Tax increases, onerous regulations and other similar measures are hardly going to help us produce more for the same amount of work. Alternatives that would result in productivity growth are (a) technological advances; (b) increase in quantity and quality of physical capital and equipment; (c) more efficient productive apparatus including both firms and business networks; (d) gains in worker skills from education and training; ( e) better utilization of factors of production; and (f) shifts of inputs from low to high-productive industries; (g) increased workforce efforts; and (h) improvements in managerial efficiency.

Wait a minute. The first Quarter of 2019 ended up - as did a few quarters before that. Could it be that we are heading in the right direction? Cannot tell you for sure from presently available data – ‘cause the latest GDP data is from the first quarter of 2019. But we can forecast to reach June 2019. To do this we first convert GDP to a monthly series and forecast it to June 19. Hours worked is available monthly and it is available ‘till June 19. Here is the “forecast” of where CT productivity is headed. And the good news is it appears to be moving in the right direction.

Figure 3

Figure 4 “breaks-up” productivity into its constituent component. Labor productivity, what we are examining here, is the amount of real state GDP divided by the number of hours worked. The growth in labor productivity is the change in this ratio over time: hence the figures displaying productivity over time allow us to discern this trend. Put differently, productivity is how much we produce per hour. The monies for our efforts. Productivity growth is essential because it promises more for the same amount of work – that is to say, it improves our standard of living.

Figure 4

Figure 4 shows productivity and its two components: real GDP in the blue and average hours worked in the red. Before the recession began, productivity was on the rise – as output (GDP) was growing but hours had started to tumble. Productivity recovered midway into the recession but output and hours continued to fall at about the same rate. Later in the recession and immediately afterwards output just kept dropping whereas hours rebounded somewhat. And as of now – hours have regained a big chunk of its post-recession drop whereas output remains anemic.
Back to our initial examination regarding the prospects of a downturn. Average Hours Worked continues to hold although the last reading for July 2019 was down a tad (-0.8%) albeit holding. There appears to be no compelling evidence for concern. What is concerning is the legislature’s inattention to growth measures; this path will surely lead to perpetual sluggishness.

NOTES: the data for Figure 1 is from the Bureau of Labor Statistics, Labor Productivity & Costs. We rebased the series to 2007:Q1 = 100 for consistency with the other graphs. The GDP series we used in our calculations is the quarterly nominal, seasonally-adjusted nominal GDP by Industry for CT. The BLS uses a different measure of output and thus the discrepancies in the absolute numbers between their series and ours (theirs was not publicly available). We use the GDP Deflator also from FRED to obtain Real GDP. Average Working Hours Total Private for CT is also available on FRED; where required, monthly AWH was converted to quarterly by aggregating by means. To temporally disaggregate from a low frequency to high frequency series and forecast the real gdp time series we used the dynamic-maxlog method in the R package tempdisagg. We used the CT Coincident Economic Activity Index to “map” the quarterly real GDP series to a monthly one. The Index is also available on FRED

A.E. Rodriguez is Professor and Chair of the Department of Economics & Business Analytics at the University of New Haven. . Divya Gade is an MBA-Business Analytics graduate student.

Citation

For attribution, please cite this work as

Rodriguez & Gade (2019, Aug. 21). The Least Explanation: Labor productivity and the future of the CT economy. Retrieved from http://www.theleastexplanation.com/posts/2019-08-22-labor-productivity-and-the-ct-economy/

BibTeX citation

@misc{rodriguez2019labor,
  author = {Rodriguez, AE and Gade, Divya},
  title = {The Least Explanation: Labor productivity and the future of the CT economy},
  url = {http://www.theleastexplanation.com/posts/2019-08-22-labor-productivity-and-the-ct-economy/},
  year = {2019}
}