The American economy fell into an unofficial recession during the first half of 2022. Yet, unemployment fell to low levels by the summer of 2022. Why did 2022 GDP fall? The US endured a historic drop in labor productivity during the first half of 2022. Productivity and GDP have recovered recently- despite the fact that unemployment rose half a percentage point since last April.1
Why did efficiency and GDP fall in the first two quarters of 2022, and rise in 2023? Some economists, like Joseph Stiglitz, think that imperfect monitoring of employees leads to productivity losses, unless corrected by government policies. Did monitoring employees get harder in early 2022? Did employer monitoring become easier in 2023?
There is another explanation for swings and productivity in the past year and a half. Job security is directly correlated with changes in employee productivity, by 50%. We can measure job security by subtracting job vacancy rates from unemployment rates. This makes sense; if there are few job openings relative to unemployment, workers feel insecure and work more productively. If there are many job openings relative to unemployment, we feel “safer”, less pressure to work hard. There is a three month lag in the effect of insecurity on labor productivity, for data available back to 2001.2
What might raise job vacancy rates to abnormal levels? Extended unemployment benefits during the COVID-19 crisis slowed the return of workers to employment. The US job vacancy rate peaked in the third quarter of 2021, and a sharp decline in US productivity followed this peak in job security. Data shows that 3.4 million workers would have returned to work earlier in 2021, were it not for extended unemployment benefits. A more rapid return of workers to work in 2021 may have averted the 2022 productivity/GDP decline. That is, extended unemployment benefits not only cut employment by millions, it raised job vacancies to an abnormal level. The abnormally high job vacancy rate in 2021 (combined with record low unemployment) reduced competitive pressure on the productivity of those who held jobs at that time.
Job vacancy rates have fallen steadily since early 2022- just before unemployment rates began to rise. That is, rising labor productivity followed renewed job insecurity.
Recent fluctuations in US GDP and labor productivity were not due to changes costs of monitoring employees. There is no need for corrective policies in labor markets. The economic problem in 2022 was that our social safety net encouraged workers to either remain unemployed or to put in less work effort. The real solution here is simple; politicians should not grant generous unemployment insurance. Or perhaps all forms of insurance should be financed and supplied privately.
- 1The first estimate for US real GDP growth in the third quarter of 2023 is 4.88%. The second estimate is 5.15%. The final estimate is pending.
- 2Here is the time series data for the first graph-
Both of these time-series trend downwards, slightly. Most of this seeming bias is due to the timing of the main drop in each series- just following the COVID crisis. This “bias” will shrink over the next decade (unless there is a repeat of the COVID crisis). A detrended version of the above linear regression yields a correlation coefficient of .4332, fairly close to the original estimate of .4944.
