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Long term or short, productivity matters
By HELEN HUNTLEY
Published February 19, 2006
Does productivity matter? Federal Reserve chairman Ben Bernanke thinks so.
"In the long run, productivity growth is the principal source of improvements in living standards," he said in a speech last year before he was nominated as Alan Greenspan's successor. Even in the short run it affects job growth, economic growth and the inflation rate, he said.
When the goods and services that companies produce are increasing at a faster pace than the number of hours workers are logging on the job, productivity is rising. The extra income the sale of those goods and services generates can be used to increase worker pay or company profits - or a little of both.
No wonder Bernanke and other economists watch the productivity numbers closely and try to figure out where they are headed. In his remarks, Bernanke said continued productivity growth of 2 to 2.5 percent a year "probably represents a good baseline assumption."
But if the pace of improvement slows so much that those growth rates don't materialize, consumers and investors could have reason to worry. Bernanke said a slowdown in productivity could slow the whole economy, dragging down consumer spending and capital investment, hurting corporate profits, limiting stock market gains and reducing household wealth.
He said it makes a big difference how consumers and businesses respond to a productivity slowdown. If they react strongly, the economy and job growth could take a big downturn. If the reaction is more muted, employment might stay strong, but higher inflation is a big risk.
Bernanke is particularly interested in how "intangible capital" affects productivity improvements. Just buying new computers or other machinery isn't enough. Businesses have to invest in research, training and organizational redesign to get the benefit of those capital investments, he said.
Bernanke's remarks are online at www.federalreserve.gov/boarddocs/speeches/2006.Click on the 2005 archive and look for the speech dated Jan. 19, 2005.
[Last modified February 17, 2006, 21:20:04]
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