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It has been 48 months since the start of the COVID-19 recession, the worst economic shock since the Great Depression.
We saw the monthly unemployment rate hit 14.8%, while the weekly estimate rose above 20%.
By comparison, the peak national unemployment rate during the Great Depression rose to just over 24 percent during the difficult summer of 1933.
Unemployment has fallen sharply as COVID-19 vaccines become more widely available.
It has stayed below 4% for two full years, the longest stretch in more than 50 years.
Readers may be tempted to say, “So what? Nearly one in twenty-five people is without a job, which still sucks.”
This view may seem reasonable, but it turns out that a healthy economy comes with significant potential job losses.
People change jobs to make more money, change careers, or avoid a bad boss. Businesses lay off employees because they may be unhappy with a particular employee or because they find a location or line of business unprofitable.
Most people worry about unemployment during a recession, but even in good times, 4.5% to 5.5% of workers change jobs each month. Because economists are good at using sensitive language, we call it the “natural rate of unemployment” or “non-accelerated unemployment rate.”
We are well below that today, which has several implications.
One result of a very tight labor market is wage growth.
Very low unemployment means a “seller’s market” for workers, who can more easily negotiate for wages or other job benefits.
Real, inflation-adjusted wage growth can only occur if labor productivity rises, but productivity rarely rises when unemployment is very low. The reason is that low unemployment usually means the economy is doing well and even the lowest-skilled workers can find jobs. Good times also mean that low-productivity companies can continue to operate.
Taken together, this means that during periods of low unemployment, we generally don’t see strong productivity growth. This is especially true as recovery time increases.
In 2020 and 2021, this business cycle will look like previous recessions and recoveries. However, productivity growth has been improving for two years.
In the first three quarters of 2023, labor productivity grew at an astonishing 4% rate. Recent productivity gains will drive growth in GDP and wages through the end of 2023. This should continue until 2024.
Labor productivity depends primarily on the talent and education of workers. But there are other factors affecting productivity growth, chiefly new technologies. We economists are not yet sure why labor productivity is growing, but I can offer two educated guesses.
The first is demographics.
For a variety of reasons, most people tend to reach peak productivity around age 30 and remain there until their 50s. On average, this is the time when people complete formal education or apprenticeships and begin their careers. Moreover, they have begun a period of “family formation,” in the romantic language of economists, which has a particularly beneficial effect on men’s productivity.
The largest group of 4-5-year-old American workers are between the ages of 30 and 50. They are Millennials and Generation X. This age group entering their most productive years is enough to explain some but not all of the productivity gains. The effect was too sudden to be explained by pure demographics.
The most likely cause of productivity growth is the effect of cumulative investment in productivity-enhancing technologies. These technologies span workplace applications from robotics to artificial intelligence to plain old digital interfaces. All of these replace tasks previously performed by workers.
Information technology has advanced over the past two decades, but business statistics do not reflect the massive investment in these technologies. One reason is simply that the price of computer technology has been falling for forty years. Therefore, expenditure data do not reflect the value these projects add to production.
However, beyond the investment data, widespread adoption of workplace technology is still evident everywhere. Today, most service delivery industries use customer interface technology. These may seem small, but removing one worker per shift can increase overall productivity by 15%.
All in all, this makes me think we may be in the midst of a productivity explosion brought about by new technologies. How and where it goes, I’m sure I don’t know. If we are in a period of sustained productivity growth, we are at the beginning of a strong economic environment that has eluded us for the past quarter-century.
Dr. Michael J. Hicks is director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics at the Miller School of Business at Ball State University.
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