Productivity: An Important And/or Useless Measure

Productivity: An Important And/or Useless Measure

US stocks dropped again as some April data shows the economy slowing. But it didn’t drop far. That may be because the main number that dropped, productivity, might be kind of useless.  

Productivity: An Important And/or Useless Measure
Productivity: An Important And/or Useless Measure

Investors still expect the Federal Reserve to raise borrowing costs this year. While S&P 500 companies are beating earnings estimates for the first quarter, most economists still predict declines in the second and third quarters, leading into a September FOMC meeting when many expect the Fed to raise the funds rate.

The ADP Employment report also disappointed, showing companies added only 169,000 new jobs in April. A Bloomberg survey of 43 economists had called for 200,000. Thursday’s jobless claims number and Friday’s monthly Employment Situation report will receive special scrutiny as a result.

(By the way, traders wanting to trade their predictions about the jobless claims or Nonfarm Payroll numbers can use Nadex binary options. The binaries allow you to take a position on whether the actual number will be higher or lower than a certain value. That way, you are trading the number itself, without trying to predict the market’s response to it.)


The other number which the media claims is affecting stocks today is a modest drop in productivity, specifically the Labor Department’s measure of employee output per hour. It fell 1.9 percent in the first quarter, after dropping 2.1 percent in the last quarter of 2014. That drop in productivity comes along with a five percent increase in expenses per worker. Workers now cost more and do less, apparently.

But those changes are small and, what's more, they may not be a problem at all. If you start giving your employees a full lunch hour and install a K-cup coffee maker in the break room, you just lowered productivity and increased costs. You also probably made yourself a more popular manager. So how useful is “productivity” as a metric?

When productivity and labor costs head in opposite directions, classical economic theory sees it as a loss of “efficiency.” The use of “efficiency” when describing human beings working is as problematic as the “efficient market” hypothesis and the whole conception of markets as places where people behave like emotionless automatons. Let me explain.

When I teach MBA students, I often have them rewrite actual memos used in top firms. They often write to their imaginary employees about how they can “increase their productivity.” I explain that while increasing productivity sounds great on a manager’s performance review, to most employees it just sounds like “work even harder.”

If you take theoretical economic models to their logical ends, the most productive employees work nonstop without concern for their families or health. Productivity doesn’t factor in the long-term well-being of people. That would be inefficient.

The economics of finance have had a similar myopic view of human behavior. The rational actors favored in model markets behave without emotion, simply latching onto the prevailing price action and pairing off against other orders in the flow. Ironically, the algorithmic computer programs that have replaced so many human traders are not so rational. Rather, they exaggerate the panics and irrational exuberance that are the bane of traditional market models.


It’s no wonder behavioral economics is getting so much attention now. According to the old thinking, the ideal economy would consist of humans who do nothing but work until they burn out and then disappear inexpensively to be replaced by fresh workers in a marketplace driven by computer programs buying and selling from each other purely for monetary profit. Efficient and productive, but hardly a recipe for human happiness.

If you think about it that way, maybe it’s good that our productivity isn’t at 100%. The value of a metric lies in whether it measures what we truly value.

Fortunately, we would never allow ourselves to use inhuman metrics like that on real people. I mean, would we create an education system, for example, where our children were evaluated primarily on their ability to score well on dozens of tests; where they were denied recess and arts so they could spend more time drilling to pass those tests; where they were judged in a statistical aggregate instead of being treated as individuals; or where they were given 15-minute lunches composed of the cheapest possible mass-produced ingredients, all just to maximize efficiency and minimize costs? We would never dream of—

Uh oh. 

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