Productivity, Labor Costs Climb in 2006
The Labor Department reported on Wednesday that productivity and labor costs have climbed in 2006. Productivity rose at a 3 percent annual rate from October through December compared to a .1 percent decline in three previous months. According to the article "For the entire year, productivity edged up by 2.1 percent, the weakest performance since a 1.6 percent rise in 1997." Productivity is helpful to the economy because it can provide a boost to our standard of living. "It allows businesses to pay workers more, because of their increased output, without having to raise the cost of their products." What is causing the slow increase in productivity? Are workers experiencing a diminishing Marginal Rate of Substitution? Have they reached the point where leisure has become more attractive than income?
According to the article, "A gauge of wage pressures tied to productivity jumped by 3.2 percent last year, the biggest annual increase in six years. But over the final three months of 2006, the cost of labor per unit of output did improve. It slowed to an increase of 1.7 percent, compared with a 3.2 percent rise from July through September." Rising wages can be good for workers but it can be tricky because if the wage increase is higher than the gains in productivity, the business will have to counteract by raising the prices of their goods.
The Federal Reserve is keeping a close watch on the situation making sure that there is no relationship between the slowing productivity/rising wage pressures and any adverse impact on inflation. They hope that businesses will meet wage demands by cutting profits instead of making goods more expensive. According to David Wyss, chief economist at Standard & Poor's in New York, "The strong relationship in the fourth quarter is good news for the economy and good news for the Fed. Productivity is what keeps inflation under control. It helps workers get pay increases without price increases." I believe if everyone knew this they would choose to be more productive, spending more hours at work. However maybe these numbers reflect a different story, that when people are at work they don't work as hard because they value their leisure time over income.
3 comments:
Increase in labor cost may have fundamental effects. On one hand, to the people in the labor force, their wage rate will increase and wage rate line in income-leisure graph will become cliffier. Although it is uncertain that whether the labor hours of people who are currently working will increase, stay the same, or decrease, it is sure that size of labor force will expand, as lots of depressed workers will be encouraged by a much higher wage rate and resend their job applications. On the other hand, employers will either try to cut down the number of their employees, or raise the prices of their productions and services to respond a higher labor cost. As a result, labor demand will shrink and prices in the market probably will increase, neither of which is good to customers, who also belong to the labor force. Considering these two sides together, because of a larger labor supply and a smaller labor demand, the competition in the labor market will be more intense.
I dooubt that many companies are going to reduce their profits in order to keep prices at a minimum. Today's economy seems to be all about "me", and very few companies are willing to lower profits in order to maintain prices. The only way for people to get lower prices is to stop buying them to force down prices, but until that happends companies are going to continue to pass the extra cost along the the consumers.
I agree with Eric on his point that today's market is all about "me". And I think it's only going to get worse if you look at how the generations, especially ours, has been raised. Companies have come to accept this fast paced growth and profitability. Higher wages won't be cutting into what they are putting into their pockets. Look around you and notice the $.20 added to this product or even $.05 to another, these increases will make their appearances one step at a time and we won't necessarily notice it right away. This all goes back to the raise in minimum wage. If the federal minimum wage is raised to $7.25, we will all notice it's negative impact on the economy.
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