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December 1984, Vol. 107, No. 12
Strong post-recession gain in productivity
contributes to slow growth in labor costs
How do changes in productivity and costs during the current economic recovery compare with earlier ones? Does the six-quarter recovery reflect a resurgence of the higher pre-1973 trend in the growth of output per hour?
Although postwar recessions have differed in length and severity, movements of productivity and cost measures follow a common pattern. Generally, employers tend to delay trimming payrolls in the face of uncertain or slack demand in order to postpone the costs associated with layoffs until the nature of weak demand becomes apparent. The resulting delayed cutback in hours contributes to the initial drop in productivity. If a contraction persists, average weekly hours are initially reduced. Eventually, employment cuts also occur, and productivity may actually increase if the belated declines in hours outstrip the fall in output.
At the trough of the business cycle, capacity utilization is low, with plant and equipment operating below optimum or design rates because of weak demand for output. Inefficient plants and equipment may be idled completely as demand may be met using only the newest, most efficient facilities. Workers who have been retained may also perform deferred maintenance or other duties previously handled by laid-off coworkers. However, these "hoarded" employees may be those with the greatest seniority, experience, and training specific to the firm's needs, making them the most costly to replace.1
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1 A recent attempt to directly measure labor hoarding indicates that as much as 8 percent of manufacturing blue-collar payrolls during trough quarters may be hoarded labor, that is, labor paid for but not required for current output levels. See James L. Medoff and Jon A. Fay, "Labor and Output Over the Business Cycle: Some Direct Evidence" (National Bureau of Economic Research, 1983).
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