labour productivity

An op-ed published in today’s New York Times takes the US Labor Department to task for grossly overstating labour productivity, “especially in the nation’s manufacturing sector”.

Productivity measures how many worker hours are needed for a given unit of output during a given time period; when hours fall relative to output, labor productivity increases. In 2009, the data show, Americans needed 40 percent fewer hours to produce the same unit of output as in 1980.

But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.

The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

Alan Tonelson and Kevin L. Kearns, “Trading Away Productivity”, New York Times, 6 March 2010.

This column has value only as a discussion starter for a basic economics course. Instructors might ask students to look for elementary errors in reasoning, of which there is no shortage.

The basic flaw is glaringly simple. Productivity, it is true, is measured as units of output (in practice, value of output) divided by worker hours. But economists measure output as value-added by capital and labour, not as the value of final products. The output of an automobile assembly plant, for example, is measured as the value of the final output less the cost of all purchased parts and paint that go into a fully assembled vehicle, leaving only the value added by workers and the capital equipment they operate. Whether the intermediate parts are purchased locally or imported from afar does not matter for calculation of output, hence productivity.

If the Labor Department actually measured productivity the mistaken way claimed in this column, that would indeed be news!

Kevin L. Kearns has a J.D. from Brooklyn Law School and is the president of the United States Business and Industry Council, an association of small manufacturers. Alan Tonelson, a fellow at the council, holds “a B.A. with highest honors in history from Princeton University” and is author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Basic Books, 2000). Neither of the two is a trained economist – fortunately. Otherwise their column would be very embarrassing for the economics profession.

Thanks to Jan Sendzimir for the pointer.

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