Recently released data confirm productivity slowdown ahead of crisis

11/05/2009 - Analysis of the current crisis tends to see a domino-like sequence of events triggered by the US sub-prime crisis in August 2007. But structural data from the real economy clearly show that the causes were not only financial. Labour productivity growth – how much is produced per worker (at the activity level only employment data are available for all countries) - was already slowing well before the crisis broke. In particular, the US construction sector had displayed worsening productivity from early 2002/2003.

Figure 1 shows a downward convergence in annual labour productivity growth (measured in percent) for the total economy in the US, Europe and Japan before the start of the crisis. US labour productivity growth at the total economy level had been weakening since 2004.

 Figure 1

Which sectors caused the slowdown of labour productivity in the US?

While labour productivity in the US industry sector is volatile, growth rates since 2005 are certainly lower than in the past 10 years. The market services sector has also seen a long-term fall in labour productivity growth since the 1998 peak. But it is the US construction sector that is one of the most important drags on labour productivity growth. In 2007, construction sector labour productivity fell 12% accounting for a fall of 0.6 percentage points of total economy productivity growth. These trends started between two and four years before the crisis.

 Figure 2

Price and financial signals were disconnected from real economy

The boom-years of the mortgage and subprime business (2005-2006) coincide precisely with the periods when productivity performance was deteriorating rapidly. Figure 3 shows how price and financing conditions in the construction and housing sectors were disconnected from productivity trends. New housing starts in the US remained high up to early 2006 before declining steadily. In parallel, labour productivity in the construction sector, after a short improvement in 2005, started to decelerate strongly again in 2006 and 2007, suggesting a problem of excess supply. However the housing price bubble was still inflating in 2005. It levelled off during 2006 and prices only started to decline significantly at the beginning of 2007. For a while it seemed that a substantial boost in demand through extended credit conditions could compensate for the supply-side problems. But the real economy eventually took its toll. By mid-2007 it was obvious that the construction sector was in an unsustainable situation.

Figure 3. US dwellings started, mortgage-backed bonds issued and house prices

 Figure 3

Stable but poor productivity  in the Euro Area

Overall labour productivity growth in the euro area has remained low and stable for at least the last 10 years. In the construction sector it has been generally in decline over this period. The exception is the industry sector where annual growth has been around 3%.

 Figure 4

Multi-factor productivity has been deteriorating in major OECD countries

One of the major drivers of labour productivity is the pace of technical progress, usually measured by multi-factor productivity (MFP). Trends in MFP in the major OECD countries provide additional evidence of the deterioration of the real economy performance in the pre-crisis years for the US and Japan. The picture is less clear in the Euro area, but by 2007 the low MFP performance was also evident there
(Figure 5).

 Figure 5

 Multifactor productivity growth

This brief analysis suggests that rather than the deterioration in the real economy being only caused by the financial crisis, the data support a more complex relationship. It shows the importance of timely and reliable information about productivity.

To read the full article please see:
http://www.oecd.org/document/30/0,3343,en_2649_34251_42579358_1_1_1_1,00.html

Productivity - OECD Data Sources

The above commentary and graphs are based mostly on two OECD databases maintained by the OECD Statistics Directorate.

OECD System of Unit Labour Cost and Related Indicators Database
This database provides labour productivity data for all OECD member countries and a limited selection of non-member countries across eight broad economic activities. In all cases the source data is the Annual National Accounts. This data can be found here:
http://stats.oecd.org/wbos/Index.aspx?DataSetCode=ULC_ANN

OECD Productivity Database
This database presents productivity (labour productivity, capital services, and multi-factor productivity) at the aggregate level and is designed to be as comparable and consistent across countries as possible. This data can be found here:
http://stats.oecd.org/wbos/Index.aspx?DataSetCode=PDYGTH