Productivity, jobs & reallocation

Paul Walker wonders whether we need macroeconomics at all. He says: “Maybe aggregate economics just doesn't work, we lose too much valuable information in the process.”
I agree. Today’s labour market numbers show the point.
They show that, in the three months ending in February, aggregate hours worked rose by 1.2%, thanks to a 1.1% rise in full-time employees. However, the NIESR estimates (pdf) that in this period, real GDP grew just 0.1%. This means that productivity fell sharply in the quarter, and rose by just 0.2% in the last 12 months.
Conventional macroeconomics says this shouldn’t have happened. Productivity fell in the recession because firms hoarded labour. But they should have unwound this in the upturn with the result that productivity should have risen, with a smaller rise in employment.
So why hasn’t this happened? One possibility is that the aggregate data hides sectoral shifts.
Imagine two firms. Firm A produces five units with five workers, and firm B produces 10 units with 10 workers. Firm A then sees its demand fall, so it produces just four units. But it leaves employment unchanged, perhaps in the hope that demand will recover. Firm B, however, enjoys a two unit rise in output, and takes on one extra worker to supply this.
In this economy, output and employment have risen but productivity is flat - though it has risen in firm B.
The lesson here is simple. A combination of a shift in demand and labour hoarding can cause “aggregate productivity” to stagnate. Conventional macroeconomics with its fiction of a “representative firm” ignores such shifts.
Of course, demand shifts from firm to firm all the time. But I suspect it is happening even more now than normal; this is what rebalancing the economy means.  It’s possible, therefore, that this effect is having an unusually depressing impact on measured productivity.
If this is right, what we are seeing is not so much an adverse supply shock but rather a reallocation shock.
This has two possible implications.
First, we might see rising unemployment soon if those firms that are still hoarding labour lose hope of an upturn and so adjust their workforces down. If these workers cannot easily move to the industries or areas that are expanding, we could see a combination of higher joblessness plus more vacancies.
Secondly - and in contrast to what we’d see if there’s been an adverse supply shock - this might be disinflationary, if those firms that have suffered lower demand cut their prices whilst growing firms enjoy enough productivity gains to hold costs and prices down. The cut in supermarket prices reported in yesterday’s CPI data are consistent with this.

Comments

[Anna]

It is sometimes difficult to relocate even though the working conditions and wages may be attractive. It's a step that has to be thought about carefully.

[toalcoja]

Dsquared is rather good on this here:

http://d-squareddigest.blogspot.com/2011/01/other-way-round-i-think-cosma-writes-1.html

[Matthew]

But surely no macro theory of productivity in recessions was ever completely without a micro foundation? The idea of labour hoarding is a micro foundation (or at least is if the idea of sectoral shifts is).

[Luis Enrique]

is this a point against "macroeconomics" or merely an illustration of the point that to think about certain questions, you need to think about multiple sectors and reallocations therein. Something which is hardly alien to macroeconomics, including thinking about how aggregate TFP statistics are affected by shifts between sectors.

[Ralph Musgrave]

To discard macro altogether would be to throw a baby out with the bathwater. If we discarded it, people would then start applying the laws of micro at the macro economic level, which leads to a number of well known economic howlers. A classic one is that at the micro level, dropping the price of a particular type of labour leads raised employment levels for that type of labour. Prior to Keynes many folk assumed that if the price of ALL labour was reduced, that would raise aggregate employment levels. Problem is, of course, that wages are the main constituent of aggregate demand. So, cut wages and demand declines, which, far from raising aggregate employment levels might actually REDUCE employment overall.