[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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CYCLICAL AND STRUCTURAL PRODUCTIVITY
Productivity growth is the key to economic growth and rising
standards of living, and the information technologies we associate
with the “new economy” have contributed significantly
to the rapid growth in productivity that the United States has
enjoyed since the mid-1990s. When productivity increased
sharply in 1996, few commentators thought the numbers heralded
a new period of sustained rapid growth. By 2000, most
were convinced that the economy’s average, or structural, rate
of productivity growth had risen.
One reason it can take several years to discover shifts in
structural productivity growth is that the business cycle itself
influences productivity. When the economy goes through recessions
and booms, GDP and employment fluctuate. Measures
of productivity such as output per hour—real GDP divided by
the total number of hours worked—will be affected as GDP
and employment change over the business cycle. It therefore
can be difficult to determine whether productivity is changing
because of a new structural growth rate or simply because
of short-run business cycle fluctuations.
The best way to understand how the business cycle affects
productivity is to visualize what happens in a small firm as the
economy enters a recession. Let’s call this firm YourPlace.com,
a business offering specialized Internet consulting and troubleshooting
services to other businesses. YourPlace.com
employs 20 people: the owner, an accountant, a sales manager,
16 computer service technicians who actually visit the clients’
sites and provide the consulting services, and a person who
manages and coordinates their schedules. Suppose that initially
YourPlace.com has 96 clients, with each service technician
responsible for 6 clients. When the economy starts to go
into a recession, YourPlace.com finds that the demand for its
business services falls. Some of its clients may go bankrupt,
while others may seek to lower their costs by scaling back
their contracts with firms like YourPlace.com. Suppose
YourPlace.com loses 12 clients; in response, it lays off 2 technicians.
Even though business has fallen, it still needs the scheduler
to handle its remaining 14 technicians, and it still needs its
sales manager and its accountant. While YourPlace.com’s business
has dropped by 12.5 percent (from 96 to 84 clients), so
that it is producing 12.5 percent less, its workforce fell by only
10 percent (from 20 to 18 employees). In other words, labor
productivity goes down. (For the sake of simplicity, we are
6
GROWTH RATE OF OUTPUT PER HOUR (%)
5
4
3
2
1
0
–1
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
SOURCE: Economic Report of the President (2004).
650 ∂ CHAPTER 29 INTRODUCTION TO MACROECONOMIC FLUCTUATIONS