In the first six months of the year, the total number of hours worked by Americans increased at an annualized rate of 2.5%, with employment increasing by 2.7 million workers. Normally, with this kind of growth in total hours worked, one would expect real gross domestic product growth of about 4% – 2.5% growth in hours and productivity growth of 1 .5%, assuming workers became more productive at about the same rate as in the 2010s.
That’s not what we have. Instead, the economy contracted at an annualized rate of 1.6% in the first quarter and at a rate of 0.6% in the second quarter. Employers were hiring at a historically strong pace, but the economy contracted somewhat due to declining labor productivity.
It cost everyone dearly. Hiring more people to produce less stuff meant lower profits for companies, forcing them to raise prices, which consumers felt was inflation. And it’s not a great dynamic for the workers either. High churn means many new hires are trying to catch up in tough times in the economy, with long-serving workers having to take over for colleagues who quit or those who are new and not yet fully trained . .
The Wall Street Journal reported a few weeks ago that a beer distributor in Michigan was grappling with this dynamic. Due to high attrition, they employ 8-12 more people than they normally would. This produces a chaotic work environment where efficiency is down, profits are down, payrolls are up due to increased staff, while they retain people that other employers need.
In general, strong labor markets are better than weak labor markets. Workers feel valued and tend to see their standard of living rise, and employers are encouraged to become more productive and invest in labor-saving equipment and tools. But as we have seen over the past 18 or so months, a labor market that is too imbalanced leads to chaos, dysfunction, inefficiency and high inflation.
For this reason, some of the signs of diminishing labor market turnover that we have seen over the past few months should be applauded by everyone. The rate at which private sector workers quit their jobs peaked in November and has been gradually declining since, although it remains above pre-pandemic levels. The level of job vacancies has fallen by 1.8 million since March, still 3 million above before the pandemic, but a sign that the labor market is balancing out.
After Friday’s jobs report, we can say that hours worked grew at an annualized rate of 2.9% in the third quarter, a bit faster than we saw in the first half. At the moment, expectations for real economic growth in the quarter are positive, with the Federal Reserve Bank of Atlanta’s GDP tracker estimating growth of 2.9%, which is at least in line with the rise in hours. worked.
Some of the recent low productivity is due to a labor market that has been more dysfunctional than strong. We need productivity growth to rebound from the abysmal trend we have seen so far in 2022 if we are to avoid more drastic economic outcomes in 2023 through efforts to contain inflation.
The intense labor market turnover we experienced in 2021 and 2022 may have been a necessary part of reopening the economy after the pandemic-related shutdowns and finding our way to a new normal. But that’s not sustainable, and we should welcome the deceleration we’ve seen over the past few months, with more to come.
More other writers at Bloomberg Opinion:
The job market is coming for the margins – or worse: Jonathan Levin
Retailers should prepare for a revenge Christmas: Andrea Felsted
Biden fails homeowners in inflation fight: Karl W. Smith
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have an interest in the areas he writes about.
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