Will Productivity Gains Boost Layoffs?

This morning was strange on the economic number cycle as far as first quarter worker productivity is concerned.  The Labor Department released a figure of non-farm business worker productivity measured as per-hour output being up by +2.2%.  Economists' estimates were down at +1.5%, which is actually already pretty high.  Manufacturing saw the biggest gain with productivity up 4.1%, with the non-durable goods manufacturing productivity being up +7.0% and durable goods manufacturing productivity up at +2.3%.

Simultaneously, labor cost pressures were less at an increase of +2.2%, lower than a +2.8% gain in Q4-2007.  Worker hours were also down across the board, in all major sectors. 

But one thing stands out here that is very obvious.  If employees are working fewer hours, wages are no longer rising as fast, and productivity staying this high, everything here is pointing to the ability for companies to make more layoffs.  In theory, a 2% productivity gain and a 2% labor cost rise would allow for roughly a 1% additional cut in workers with the company able to maintain roughly the same cost structure on a static basis.  The world isn't static, but that is a general estimate.

If this 1% additional layoffs came, it would be far short of the 7 million workers in the U.S. that we pondered could get laid off if things get extremely worse from current levels.  At some point it gets harder and harder to get more and more milk from the same cows, but so far that hasn't occurred.

Jon C. Ogg
May 7, 2008