Meltdown 101: How productive are we as a nation?

[December 04, 2008]  NEW YORK (AP) -- If you're employed, you're one of your company's assets. The measure of how well your employer uses you is your productivity -- the goods and services you produce for each hour you work.

The national labor productivity report tracks how well companies are doing, across the economy, at getting more out of their workers. Greatly simplified: If factories have retooled to operate more efficiently, productivity increases. If too many workers are at their desks playing "Minesweeper," productivity falls.

The Bureau of Labor Statistics reported Wednesday that productivity rose in the third quarter. But the details of its report weren't pretty.

Here are some questions and answers about productivity.

Q: Why is productivity important to the economy?

A: Advances in productivity mean businesses are producing more with the same or fewer hours worked by employees, making improved productivity a significant source of potential national income.

"The U.S. economy has been able to produce more goods and services over time, not by requiring a proportional increase of labor time, but by making production more efficient," the Bureau of Labor Statistics, which produces the productivity numbers, explains on its Web site.

If rising wages and benefits outstrip productivity improvements, that can spark inflation, as businesses are forced to increase prices to cover higher costs. If workers are more productive, though, businesses are able to raise pay, covering the costs with income from increased output of goods and services.

During a recession, output falls, which hurts productivity. In such times, rising layoffs tend to keep wages from going up -- which is what seems to be happening now.

Hours worked dropped 3.1 percent at non-farm businesses in the July-to-September quarter from the prior quarter, but output fell a smaller 1.9 percent. So, workers are working far fewer hours to produce slightly less. As a result, productivity rose at an annual rate of 1.3 percent in the quarter, the weakest showing since the fourth quarter of 2007.

Q: How is productivity measured?

A: The bureau's quarterly reports on productivity split the economy into segments. The most important is non-farm business, which comprises roughly 75 percent of the total economy.

The bureau first calculates total output for non-farm businesses. Instead of counting every car that rolls off an assembly line and every lawn mowed by a landscaping crew, the government uses total gross domestic product figures -- the broadest measure of the economy -- and subtracts output generated by farms. It also subtracts output generated by the government, nonprofits, employees of private households and the rental value of owner-occupied homes.

Data from those groups are excluded because there's no clear way to measure their productivity. For instance, how much time does a homeowner spend maintaining her house? What would make a baby's nanny more efficient?

The government takes its total productivity figure and divides it by the total number of hours worked, a figure it gets from its current employment statistics program and the National Compensation Survey.

Q: What might affect productivity?

A: If output drops and the number of hours worked is flat, then productivity will fall, because the same number of people will have worked the same number of hours to produce less. What happened in the quarter reported Wednesday was that both output and hours dropped -- but hours worked dropped more.

Q: How has U.S. productivity behaved over a longer span of time?

A: It's been enviably healthy. Productivity grew rapidly in the 1960s, slowed from the 1970s to the mid-1990s, then went on a tear. It began accelerating in 1996 to nearly twice its earlier pace, averaging 2.7 percent a year for the next decade.

Economists don't agree on what was behind that leap, but most pin it on improvements in technology, business processes, inventory management and retailing.

[Associated Press; By ELLEN SIMON]

AP Economics Writer Martin Crutsinger contributed to this report.

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