Labor Market Strength Is Also a Sign of Dysfunction

The biggest puzzle in the US economy this year has been two straight quarters of negative real economic growth accompanied by booming job growth. As a result, on a year-over-year basis, workforce productivity growth has been historically bad. There's plenty of reasons for this following two weird pandemic years, but an underexplored cause is that the strong labor market has led to too much turnover in the workplace, creating disruptions and unpredictability for businesses. A softer labor market would be better for workers, employers and consumers alike.

In the first six months of the year, the total number of hours worked by Americans grew at a 2.5% annualized rate, with employment growing by 2.7 million workers. Ordinarily, with that kind of growth in total hours worked you'd expect real gross domestic product growth of 4% or so — 2.5% growth in hours and 1.5% productivity growth, assuming workers became more productive at roughly the same pace as in the 2010's.

That's not what we got. Instead, the economy contracted at a 1.6% annualized rate in the first quarter and a 0.6% rate in the second quarter. Employers were hiring at a historically-robust pace but the economy shrunk somewhat as the productivity of the workforce fell.

That's been costly for everyone. Hiring more people to produce less stuff has meant lower profits for companies, pressuring them to raise prices, which consumers have felt in the form of inflation. And this isn't a great dynamic for workers, either. A high churn rate means a lot of new employees trying to get up to speed at a challenging time in the economy, with longer-tenured workers having to pick up the slack for colleagues who are quitting or those who are new and not yet fully trained.