Apr 24, 2024 - Economy

How tight labor markets fuel the productivity surge

Illustration of  a cubicle made of money.

Illustration: Rebecca Zisser/Axios

One of the most important questions for the economy in 2024 is whether the surge in worker productivity that occurred in 2023 will prove to be both real and durable.

Why it matters: The answer will determine whether last year's combination of robust growth and falling inflation can continue, driving Americans' incomes higher and giving the Federal Reserve a green light for interest rate cuts.

  • While some Fed officials are skeptical that the productivity surge will continue, there are some signs that it is fueled by economic fundamentals facing corporate America — particularly a scarcity of workers — in which case it could have room yet to run.

The big picture: Productivity is the dark matter of economics: a tremendously important concept that is not deeply understood at the microlevel.

  • Labor productivity is a residual of how much economic output is generated for every hour of work.
  • Measurements are volatile and imprecise, and economists don't claim to know with certainty what is happening at the level of corporate decision-making that causes productivity to rise or fall.

State of play: With the unemployment rate below 4% for more than two straight years and the baby boomer generation retiring from the workforce, companies may have a greater impetus than in the recent past to find ways to squeeze more output out of their workforce.

  • That can include capital investments — relying more on software and machinery — or changes to training, work processes, or how individual workers and employers match with each other.
  • In effect, worker scarcity creates upward pressure on wages, which in turn puts pressure on companies to achieve productivity gains commensurate with those higher wages.

What they're saying: "Right now most companies don't feel like they have anywhere near the pricing power that they had a year or two ago," Rich Lesser, global chair of Boston Consulting Group, tells Axios. "And yet wages continued to go up 3 or 4%."

  • "I think that puts a productivity challenge into the mix. It also puts more pressure on innovation and finding new ways to drive growth."
  • For example, he recently met with an executive for a quick-serve restaurant chain in California, who intends to grapple with a new $20 per hour minimum wage there by cutting staffing and adding checkout kiosks.

The bottom line: "To accelerate the productivity engine, technology is often the fuel, but labor and wage pressures are the spark," says Lesser. "Right now we have both."

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