As I am sure everyone is aware, parts of our economy are really struggling this past year, with the crisis in the sub-prime loan market, rising inflation and the Federal Reserve battling to prevent a recession, we hear many bad things about our economy and how it is functioning. As we hear all of these negative things, it is important to remember that not all facets of our economy are plunging. One area that was far better than it was projected to be was productivity. Productivity is defined as output per unit of labor. Productivity, although decreasing in at the end of 2007, did not decrease as much as predicted. Productivity changed at a 1.8% increase for the fourth quarter of 2007, which is far above the Wall Street expectations and forecasts of 0.5%. In addition to this, unit labor costs (which are a large driver of inflationary pressures) rose 2.1% in the fourth quarter. This is below the expected increase of 3.8%. What this means for our economy is that everything is not going as poorly as we thought that it was. Labor is one of the most important factors of production costs, this is because it is one of the biggest costs of any business, and if our labor force is not productive it will result in more labor to produce the same output (i.e. not efficient!). Either this will result in higher prices that are passed through the businesses as higher prices for consumers, or they will be absorbed in the firm through a loss in their profit margin.
http://online.wsj.com/mdc/public/page/2_3024-prod.html
After reading all of that technical jargon, you may be wondering, “how does this apply to me since I am only a college student?” First of all, it is apparent that not everything in our economy is going as bad as say the sub-prime loan market or other financial markets. Although parts of our economy are not doing well at all, others are not as bad off. Ok, now we have to delve in a little farther to understand how this applies to us as a young, college generation. The overall picture here is that trend productivity growth (that is productivity growth over a length of time) plus trend labor force growth (growth in the labor force over time) equals potential GDP growth. Now you are thinking, “What does that mean?” The reason that potential GDP growth is so important is that it measures how fast our economy can grow. You could think of it as the speed limit for our long-term economy.
There is one phrase in the article that I would like to break down for you, is says, “Over the long term, strong productivity growth is a win/win situation resulting in weak unit labor costs and the stronger wage growth allowed through the increased output produced.” What this means in that strong productivity growth (like we had this last quarter) is good for us because it results in low costs for each unit produced and higher wages for everyone through more units being produced. Basically, the reason that productivity is so important to anyone is that there is a direct correlation between productivity and wage increases.
