Friday, August 08, 2003

Here is some nice analysis of the latest productivity numbers by Patrick, a commentor over at "It's Still the Economy, Stupid".
Let's say that you had a factory with 100 workers producing 120 units/quarter, when suddenly demand drops to 100 units per quarter.

So you accumulate inventory, and/or slow down production, but demand stays at 100 units per quarter, so eventually you have to let go twenty workers.

Astutely, you keep the most productive workers and let go the least productive workers. But you can't take advantage of the higher productivity until the excess inventory is cleared out.

A few quarters later, your production line is back up to "normal" speed, but now you actually have higher productivity than you used to.

There's no productivity growth involved, despite the 5% increase in productivity.

There's no recovery, either, demand is still stuck at 100 units per quarter.

And if the ultimate goal is high employment, then dramatic economy-wide increases in productivity are *not* what you are after.

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