Bharat Trehan

John P. Judd

English

Research Papers in Economics

FRBSF WEEKLY LETTER
June 22, 1990
Working Harder?
The current economic expansion, which began
at the end of 1982, is the second longest since
World War II. In per capita terms, it has ex-
hibited average growth that is more rapid than
any previous postwar expansion, except for the
very short upturn in 1958-60. What accounts
for the unusually strong performance of the u.s.
economy in the 1980s? In this Letter we argue
that a change in labor supply has contributed
to the staying power ofthe current expansion:
on average, individuals have been working more
hours per week and have been more willing
to take jobs than in the past.
Strong growth
The strength of the current expansion can be
seen in Chart 1, which piots real output (GNP
adjusted for inflation) per working-age person
(sixteen years and older) from 1951 through 1989.
This measure (referred to hereafter as "per capita
real output") enables us to focus on the funda-
mental economic factors that have contributed to
output growth, and abstracts from any impetus
provided simply by growth in the working-age
population.
percent average rate of growth experienced in
the other postwar expansions, and especially
high when compared with the very low rates
of increase (1.6 percent average annual rate)
during the two expansions in the 1970s.
Moreover, the duration of the current expansion,
now at 7112 years (and counting), is surpassed
only by the 1960-69 expansion, when per capita
real GNP grew at an average rate of 2.7 percent
annually. The 1960s expansion is recognized as
the benchmark for the performance of postwar
expansions in the u.s. The current expansion is
on the verge of becoming the new benchmark.
Changes in the labor market
To arrive at a better understanding of the under-
lying factors that account for the relative strength
and longevity of the current expansion, we de-
compose growth in per capita output into four
components. Analyzing how the changes in each
of these components compare with those in prior
expansions helps to identify the factors that have
contributed to the economy's superior perform-
ance in the 1980s.
During the current expansion, per capita real
output has grown at a 2.8 percent annual rate.
This growth rate is high compared with the 2.2
'population 16 Years and Over
These components are: first, the proportion
of the population sixteen years and older that
decides to work or to seek work (the labor-force
participation rate); second, the proportion of the
labor force that is employed (the employment
rate); third, the average hours worked by the
employed population (average hours); and finally,
the average production of goods and services
obtained from an hour of work (labor productiv-
ity). The product of the growth rates of these four
components is the growth rate of per capita
output.
The level of the labor force participation rate has
risen noticeably in the current expansion, but the
rate of increase is not substantially different from
that over the 1970s. Given the fairly steady in-
crease in labor force participation over the last
twenty years, it appears that the acceleration in
per capita GNP growth in the 1980s is not the
result of a sudden surge in the proportion of
the population that is in the labor force.
- 16
- 18
- 14
12
1990
Thousands
1982 Dollars
(Log Scale)
- 24
22
20
1980 1970 1960
Chart 1 ,
Per Capita Real GNP
1950FRBSF
Interpreting the trends
Now that we have identified the underlying
trends, we can use our findings to weigh alter-
native explanations for the faster-than-average
rate of growth of per capita output in the 1980s.
One explanation that is contradicted by the data
is that technology shocks-such as new inven-
tions-were a major factor. If, on balance, such
developments had been important, they should
have shown up in the productivity figures. Al-
though the rate of growth of output per hour was
higher during the 1980s than it was during the
1970s, the difference between the two is not very
pronounced. A note of caution is warranted here,
however. John Kendrick, a productivity expert at
George Washington University, argues that pro-
ductivity growth is being understated in current
statistics, in part, because of the difficulty in
measuring changes in service-sector productivity.
A second explanation, namely, that an increase
in the supply of labor-,boosted economic growth
in the current expansion, is consistent with the
trends we observed in the components described
above. Specifically, an increase in individuals'
willingness to work is consistent with the strong
growth of average hours, the employment rate,
and the participation rate during the 1980s.
week in 1989, and the rise in the employment
rate from 90.3 percent to 94.7 percent over the
same period.
A number of considerations can help to sort out
these two competing explanations. First, it seems
unlikely that a demand-induced increase in la-
bor hours would persist long enough to sustain
the current expansion for 7Y2 years. In the past,
such demand-induced increases have lasted for
only a year or two, as can be seen in Chart 2,
However, a third explanation also is possible,
namely, that rapid economic growth is the result
of a cyclical increase in aggregate demand,
which led to a rise in the demand for labor. For
example, expansionary fiscal policy associated
with record federal budget deficits, possibly
reinforced by an easing of monetary policy as
inflation subsided, could have raised demand
and led to rapid growth in output per capita.
With real GNP expanding rapidly, employers
would hire more workers (raising the employ-
ment rate) and would ask current workers to put
in longer hours (raising average weekly hours).
42
41
Hours
43
- 40
'~- 39
1980 1970 1960
Chart 2
Average Hourly Workweek
,...,......",..,..,...,.+....r+............,..,............;~....,..T""T"'T",....for'TT-rT'T"T,...,....f 38
1990 1950
In summary, then, the distinguishing character-
istics ofthis expansion compared to those in the
1970s are the rise in average hours worked from
38.1 hours per week in 1982 to 39.6 hours per
The second component, the employment rate,
has risen significantly during the current expan-
sion, after declining sharply over the 1970s and
early 1980s. The employment rate is now at ap-
proximately the same level as at the beginning of
the 1970s. This rise in the employment rate (fall
in the unemployment rate), then, appears to have
been a factor associated with the higher-than-
average rate of per capita output growth over
the course of this expansion.
Average weekly hours during this expansion
also have differed from past expansions. Hours
declined more or less continuously from 1951 to
1982. Since that time, however, hours have been
increasing steadily (see Chart 2). Although it is
too early to be sure that this new upward trend
is permanent, the sustained increase since 1982
is striking when put in the context of the steady
decline over the previous three decades.
In contrast, the final component of output per
capita, productivity growth, does not appear to
have been a distinguishing feature of the current
expansion. Productivity growth certainly was the
most notable feature of the strong GNP growth in
the 1960s, and slowing productivity growth ex-
plains most of the slowdown in the GNP trend in
the expansions ofthe 1970s. During the 1980s,
however, productivity growth has increased only
moderately even though output has grown
rapidly.Chart 3 .
Help Wanted Advertising Index
Bharat Trehan
Senior Economist
But whatever the explanation, it seems far more
likely that the economic expansion of the 1980s
has been sustained by a rise in workers' willing-
ness to work than by an increase in aggregate
demand, which is inherently transitory. This de-
velopment may be an important reason for the
strength and longevity of the current expansion.
John P. Judd
Vice President and
Associate Director
of Research
Why the increase in labor supply?
What could have caused such an increase
in willingness to work? One possibilit·t is that tax
reform in the early 1980s, which reduced margi-
nal income tax rates, may have induced greater
work effort. In fact, this was touted as a beneficial
effect of the legislation when it was proposed. In
theory, however, the relationship between wages
and vvork effort is ambiguous. lA, higher after~tax
wage rate could raise hours worked by increas-
ing the return to such added effort, or it could
reduce work effort by making it possible to work
fewer hours and still earn the same income. A
large body of empirical research has failed to
settle the issue. Thus, there may be other expla-
nations for the apparent rise in work effort over
the last decade.
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
1950 1960 1970
*Scaled by Total Nonfarm Employment
A final consideration is the behavior of job
vacancies during this expansion. If an increase
in labor demand were the primary cause of labor
market developments, the employment rate and
the number of job vacancies at firms would have
risen together. In contrast, an increase in willing-
ness to work would have caused the employment
rate to rise, as unemployed members of the labor
force accepted employment earlier in the job-
search process, and would have caused firms'
vacancies to decline.
Although data on the vacancy rate are not
available, it is possible to use a proxy (following
research by Katherine Abraham)-the national
help-wanted index compiled by the Conference
Board in New York (see Chart 3). One obvious
feature of the help-wanted advertising series
shown in the chart is the change in its level
after the 1960s. Researchers have attributed
this change to more rapid shifts in the sectoral
composition of the economy after the 1960s,
raising the level of so-called frictional unemploy-
ment as workers changed jobs between different
industries.
Another consideration is that although the aver-
age number of hours worked by each individual
increased in the 1980s, the average number of
hours worked on each job did not. These findings
suggest an increase in the number of individuals
working at second jobs, and are consistent with
a greater willingness to work. If an increase in
demand had fueled the expansion in average
hours, it is likely that hours per job would have
gone up as well as hours per person.
where they show up as transitory increases in
average hours worked at the beginning of each
expansion. Thus, the sustained increase in hours
worked in this expansion seems to reflect a
change in workers' underlying preferences.
For our purposes, the interesting point is that
during the current expansion the index did not
rise as high as it did during the expansions of the
1970s, suggesting a smaller number of vacancies
than in the earlier expansions. Since vacancies
were weak despite the increase in the employ-
ment rate, a willingness-to-work explanation
seems more likely than a rise in labor demand.
Opinions expressed in this newsletterdo not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor (Barbara Bennett) or to the author.... Free copies of Federal Reserve
publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco 94120. Phone (415) 974-2246.Research Department
Federal Reserve
Bank of
San Francisco
P.O. Box 7702
San Francisco, CA 94120

Working harder?

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