This morning, the Bureau of Labor Statistics released its monthly Employment Situation Summary, known as the Jobs Report, showing another month of continued job gains. Adding 275,000 jobs for the month of February, above consensus predictions of 200,000 jobs added, the continued expansion of the U.S. labor market following the COVID-induced economic crisis of 2020 is beyond my expectations from experiences of the Great Recession and studying previous modern recessions. Job growth has also continued alongside wage growth, with workers gaining real income as inflation has cooled. Despite evidence that some structural disparities remain, namely higher unemployment of Black and Latinx workers, the labor market continues to chug along in a positive direction.
Despite the good news, there is always a hesitancy that hangs in the air when the Jobs Report is “too good.” This is because economists and business commentators fret over the risk of an overheating economy, heading us back toward inflation (despite a lack of evidence that a tight labor market caused inflation in recent years) or a bubble that can burst (like the housing bubble that impacted the Great Recession).
But productivity data released last month points toward another pathway. As labor productivity and output increased 3.2% and 3.7% in the last quarter of 2023 according to data from the Bureau of Labor Statistics, maybe the U.S. labor market can actually “have it all.” Productivity growth is the key factor in an economy where economic activity can lead to sustainable economic growth alongside increasing wages and jobs for workers.
Not only have we seen evidence of “having it all” with both higher productivity and higher wages, with average hourly earnings increasing 5 cents or 0.1% in February and 4.3% over the year, but economic theory and research suggests that higher earnings itself helps maintain high productivity.
The economic concept of “efficiency wages” describes employers who pay above market-clearing wages (or the bare minimum needed to hire all available workers) to induce higher productivity itself. There are a few reasons this might happen, but one critical one is reducing worker turnover. Tenure within a firm has been shown consistently to lead to higher productivity. According to Bureau of Labor Statistics data, the quite rate peaked at a historic 3.0% in September and again November 2021. As workers changed jobs at historic rates coming out of the brief pandemic crisis, they were able to find jobs that paid better. Businesses looking to recruit workers have learned a fundamental lesson of economics: paying more gets you more. And as wages have increased, particularly for low-wage workers, the quit rate has come down to 2.1% as of January.
Social researchers believe higher wages boost productivity because people are less likely to shirk their responsibilities at work—since you have more to lose with job loss when you’re paid more—and raise worker morale. Georgetown University economist George Akerlof contributed to the development of the field of behavioral economics when he developed an understanding of efficiency wages as a sort of gift exchange. While what you pay workers is a matter of numbers on its face, it also shapes workplace norms that incentivize high productivity.
Empirical research backs this up. In a paper by Natalia Emanuel of the New York Federal Reserve and Emma Harrington of the University of Virginia that looks at call centers and the warehouse sector, they find that increasing wages by $1 leads to productivity increases of a value greater than $1. Even when controlling for how workers select into jobs, the effect comes from incentivizing more productive workplaces rather than just recruiting more productive workers because wages are higher.
Today’s Jobs Report gives more evidence that the tight labor market is continuing, providing a foundation for good jobs and high productivity. There are likely also other factors at play that support increasing productivity, including the expansion of AI and the impact of federal investment in sectors of the economy like battery manufacturing and climate mitigation. These additional trends can maintain high productivity, but quality jobs are a fundamental part of supporting a resilient productivity gains.
