Payrolls Rising with Lower Labor Productivity

Popular Economics Weekly

Suddenly it looks like the U.S. economy isn’t stalling. Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate fell slightly to 7.5 percent from 7.6 percent in March, reported the U.S. Bureau of Labor Statistics last Friday. I suspected as much in my April 29 column (Will U.S. Growth Slow in 2012?) due to the large seasonal adjustments deducted from last month’s actual 729,000 increase in payroll jobs.

On top of that, the change in total nonfarm payroll employment for February was revised from +268,000 to +332,000, and the change for March was revised from +88,000 to +138,000. With these revisions, employment gains in February and March combined were 114,000 higher than previously reported.


Graph: Calculated Risk

So maybe the sequester cuts in government spending may not be harming growth as much as predicted—at least for the present. The Congressional Budget Office predicted a loss of up to 750,000 jobs and 1.5 percent in GDP growth in 2013 due to the sequestration cuts.

Why the large revisions to such an important economic indicator? Circumstances may be mirroring that of an earlier era. President Clinton saw some 22 million jobs created during his term, while government spending was reduced due to an earlier cutback in defense spending. The slack was made up by booming exports due to a reduced dollar exchange rate, a more accommodative Fed under Chairman Greenspan, the dot-com bubble that saw a boom in high tech investments, as well as the beginning of the last housing boom that ultimately resulted in the housing bubble.

It may be harder to identify the current growth drivers coming out of this Great Recession. But Fed Chairman Bernanke is pursuing the same business-friendly practices as predecessor Greenspan with record low interest rates and the QE securities’ buying programs that has also boosted exports.

Could it be the high tech, digital replace-workers-with-machines revolution has slowed, along with productivity growth, which means the current workforce has reached the limits of its output, so that hiring has to increase? Nonfarm business productivity rebounded an annualized 0.7 percent, following a decline of 1.7 percent in the fourth quarter. Unit labor costs rose 0.5 percent, following a 4.4 percent jump in the fourth quarter. That is usually a sign of the need for increased hiring, and Q1 seems to have confirmed it. We know the importance of keeping labor costs down, since such costs make up two-thirds of product costs.


Graph: Econoday

So increased hiring is probably why unit labor costs plunged in Q1 2013, which are the costs associated with producing ‘one unit’ of product. Year-ago unit labor costs were up 0.6 percent, compared to 2.0 percent in the fourth quarter. Hourly compensation was up 1.6 percent, following 2.7 percent in the fourth quarter.

More good news was the National Federation of Independent Business (NFIB) report that hiring had increased in the small business sector in particular. “April was another positive, albeit lackluster month for job creation—but small-business owners are expressing a bit more enthusiasm in hiring plans in the months to come”, said NFIB Chief Economist William Dunkelberg. “According to NFIB’s latest data, small employers reported increasing employment an average of 0.14 workers per firm in April. This is a bit lower than March’s reading, but still the fifth positive sequential monthly gain.”


Graph: NFIB

The higher payroll and small business hirings could mean productivity gains for robots and other high tech productivity aids are reaching their limits. It looks like robots can only do so much of the work.

Harlan Green © 2013

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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