US productivity surpasses that of the G10 pears

Earlier last week, we saw data from the US suggesting that the level of non-farm payroll employment in March of this year was 818k lower than previously assumed. There is consternation among those who argue that the Fed should have eased policy well before now. But unless output is revised down at the same time, the revisions mean that those in work have probably worked harder – and that’s a good thing.

The upside of downward revisions to the level of employment is that it suggests that productivity is higher than previously assumed. And, at the end of the day, it is productivity that determines whether an economy can flourish, not the level of employment. The adjustment to productivity might be small given that 818k fewer payrolled employees than previously thought is only around 0.5% of total payroll employment.

Nonetheless, it not only adds to the narrative that the US is outstripping its G10 peers when it comes to productivity growth, but it may have something to say about the big migration inflows that the US has seen in recent years; something that presidential candidate Trump wants to reverse. Why do we say this?

Underlining this thought process is that those migrating to the US, and perhaps especially the undocumented migrants that Trump is so keen to deport, are inherently harder workers. On an anecdotal level this might seem valid. But is there any empirical proof? After all, this can cut both ways. For while it might appear that migrant employees inherently work harder, the relative cheapness of their labour could make firms scrimp on capital investment and that, in time, could lower overall productivity.

In the UK, a report issued by the Institute of Labour Economics reported that a 1% rise in non-EU migration into the UK lifted productivity by 1.5%. And, in the US, as we’ve said before, part of the reason why there has been such a big downward revision to payrolls might be due to the fact that undocumented migrants may have been recorded in the monthly payroll data, but fell out under these revisions, which are taken from official tax records. If US productivity is even stronger than currently reported, it would mark both a stunning improvement on prior performance and imply an even bigger advantage over many of its peers.

For instance, US output per hour is currently running close to 3% in annual terms while that in the UK is running around zero. This is an unusually big US advantage and may be even bigger given these employment revisions. Other policymakers, such as those in the UK can only look on in envy. The issue, of course, is how to replicate the US’s success.

On this point, it is interesting that the new UK government seems to be adopting a different approach to labour relations than its predecessor; granting what, for some are high wage awards but also seemingly treating s in a more ‘grown-up’ fashion that, it hopes will encourage better engagement and, perhaps, better productivity.

In addition, there is an argument that the more expensive labour becomes, the more firms will invest and the more this might lift productivity. Of course, it is very early days yet and there’s much more to Labour’s drive to lift growth and productivity. History suggests that big gaps between productivity growth in the US and UK do not last for long.

A second term for Trump could close this gap quite quickly if mass deportations occur. And if this productivity gap does close in the next year, or two, then sterling might continue the climb that we’ve seen since Labour came into office