New economy productivity

A review of recent U.S. recessions shows that there has been a change in the behaviour of productivity. Historically, a sharp drop in productivity preceded recessions, as employers kept workers on even as output fell.

Productivity rose after the recession mainly because employers were reluctant to hire as output increased, says Bruce Bartlett:

  • Thus, in the 6 quarters preceding the trough of the 1973-75 recession there was zero increase in productivity during that whole period.

  • In the 6 quarters before the 1981-82 recession, the total increase in productivity was just 0.8 percent.

  • In the 6 quarters after the trough, productivity rose by 5.9 percent in both cases.

    This started to change with the 1990-91 recession.

  • Productivity rose by 1.2 percent going into the recession and 4.5 percent coming out.

  • The higher productivity going in meant that fewer workers were needed coming out of the recession.

    Now, in the current recession, which ended in the 4th quarter of 2001, we have seen even higher productivity on either side. The latest data show an increase in productivity of 4 percent in the 6 quarters before and 6.5 percent in the 6 quarters after. That is why employment growth and hiring levels remain weak. Employers are raising output without adding much new labour, explains Bartlett.

    It is important to remember that this is a short-run phenomenon. In the long-run, higher productivity increases employment, a fact documented in 2 new studies from the Federal Reserve Bank of Richmond and the Federal Reserve Bank of San Francisco. But in the meantime, employment growth may still be slow for a couple more months.

    Source: Bruce Bartlett, New Economy Productivity, National Center for Policy Analysis, August 11, 2003.

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    Last week, Mario Monti, Europe's competition czar, announced that he was prepared to levy fines and force further changes to Microsoft's computer operating system.

    In essence, Monti wants to force Microsoft to turn over its own intellectual property to its global competitors. A press conference was called mainly to let the world know Microsoft was being given one last chance to repent and surrender, says the Wall Street Journal.

    The European Union’s regulations increasingly seek to tie down not just European companies but also those from any part of the world that trades with the EU:

  • Microsoft has already modified Windows to let computer makers configure their machines to give more prominence to media players made by Microsoft's competitors, such as Real Networks' Real Player.

  • Computer makers are even free to hide the media player that Microsoft includes (free) in every copy of Windows.

    Why isn't this enough?

    According to the Journal, Monti's investigators sent out questionnaires to businesses that distribute audio and video files. At the press conference, the commission then triumphantly declared that the answers showed that most content providers are inclined to make their video and audio clips compatible with Media Player, because it comes already installed on new Windows machines.

  • In other words, the commission's evidence consists not of anything Microsoft itself has done, but the fact that potential users like what it has done.

  • All this makes the commission's proposed remedies – either sell a crippled version of Windows that can't play content, or else make sure Windows machines all have both Microsoft's media player and a competitor's – particularly perverse.

    Somehow the U.S. government has to draw a line in the sand here, says the Journal. Intellectual property and services are the growth engine of the modern economy, of which Microsoft is a crown jewel, it explains.

    Source: Editorial, Monti’s Wrecking Crew, Wall Street Journal, August 7, 2003.

    For text (WSJ subscription required),,SB106021398070464800,00.html
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    FMF Policy Bulletin\12 August 2003

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