Getting Productivity and Employment Backwards

Consider the following quote from Fed Chief Greenspan’s testimony to Congress:

The strong gains in productivity, however, have obviated robust increases in business payrolls. To date, the expansion of employment has significantly lagged increases in output. Gross separations from employment, two-fifths of which have been involuntary, are about what would be expected from past cyclical experience, given the current pace of output growth. New hires and recalls from layoffs, however, are far below what historical experience indicates. To a surprising degree, firms seem able to continue identifying and implementing new efficiencies in their production processes and thus have found it possible so far to meet increasing orders without stepping up hiring.

In all likelihood, employment will begin to grow more quickly before long as output continues to expand. Productivity over the past few years has probably received a boost from the efforts of businesses to work off the stock of inefficiencies that had accumulated in the boom years. As those opportunities to enhance efficiency become scarcer and as managers become more confident in the durability of the expansion, firms will surely once again add to their payrolls.

In other words, the Fed Chief is saying “Once Productivity slows, Employment will pick up.”

However reluctant I may be to disagree with my betters, I must put aside such reservations and raise the following question: Isn’t this confusing cause and effect?

I’m no economist (‘though I play one on TV), but its my understanding that increased productivity is the reason why we haven’t seen much additional corporate hiring. But that doesn’t mean that decreasing productivity will lead to more hiring — just the opposite. Increasing hires make firms appear slightly less efficient.

In order to expand, firms will hire more people. There will likely be some short time lag between the new hires and any increase in output. Thus, short term, their productivity stats will decrease.

Perhaps I am misunderstanding the Chairman’s statment. Maybe he meant to say that employers will be forced to hire more workers faster as productivity gains become scarcer — just in order to maintain the same output. Not to put words into the Sir Alan’s mouth, but that might make more logical sense than his origianl statement.

Otherwise, it would be a little astonishing to see the Federal Reserve Chairman confusing cause and effect in so important — and basic — of a building block of the broader economy.

Then again, that might help explain some things . . .

UPDATE: 2/13/04 11:59 am EST
Here’s the quote from Greg Ip’s WSJ column Thursday on the Fed Chair’s statement:

Mr. Greenspan said it is “utterly inconceivable” that productivity growth, which topped 5% last year, can continue at that rate. As businesses run out of unused labor-saving technology to exploit, it “is going to slow down significantly” and “you will begin to create significant job growth.”

That suggests the same cause effect confusion as is in the original Fed Statement . . .

UPDATE: 2/13/04 2:49 pm EST
A friend (who insists on anonymity) writes:

“When the inefficiencies are all exploited, Productivity will stagnate at the current, lofty levels — not decline. HIRING MAKES IT DECLINE. DO THE MATH. Now take your thinking from there, Skeezix. HE HAS CAUSE AND EFFECT BACKWARDS.

’nuff said.

UPDATE: 2/13/04 2:49 pm EST
There’s a full write up in CNN Money today on Greenspan’s productivity issue.

The key to job growth in 2004
By Mark Gongloff
CNN/Money, February 17, 2004: 7:46 AM EST
http://money.cnn.com/2004/02/16/news/economy/productivity/index.htm

Sources:
Testimony of Chairman Alan Greenspan
Federal Reserve Board’s semiannual Monetary Policy Report to the Congress Before the Committee on Financial Services, U.S. House of Representatives
February 11, 2004
http://federalreserve.gov/boarddocs/hh/2004/february/testimony.htm

Greenspan Predicts Job Growth Will Soon Begin to Accelerate
By GREG IP
WSJ, February 12, 2004 8:23 a.m. EST
http://online.wsj.com/article/0,,SB107651634163626952,00.html

Fed Monetary Policy Report to Congress (PDF)
http://federalreserve.gov/boarddocs/hh/2004/february/fullreport.pdf