1. In the Shoes of a Fed Policy-Maker Federal Reserve Bank of New York What About Productivity? Raymond W. Stone Stone & McCarthy Research Associates August 16, 2007

2. What Is Productivity? Productivity is a measure of the efficiency of the labor force. Productivity is a function of a variety of factors including the skill set of workers (education), and the state of the tools available to these workers (technology)

3. How Do We Measure Productivity? Productivity is measured in terms of units of output per hour of labor input Productivity = Output/Hours A proxy for productivity might be GDP per Hour Worked Productivity Proxy = GDP/Hours

4. Output Derived From GDP

5. Hours From The Employment Data

6. Why Do Policy-Makers Care About Productivity? Productivity Growth in Combination with Labor Force Growth Determines the Economy’s Trajectory of “Potential GDP”, the Speed Limit for Economic Growth Productivity Growth in Combination with Hourly Compensation Costs Determines “Unit Labor Costs”, a Key Factor Underpinning the Prospects for Inflation Productivity is a Critical Variable Influencing the Fed’s Ability to Fulfill the Dual Mandate of Maximum Sustainable Growth and Price Stability

7. Productivity and Maximum Sustainable Growth The Trajectory of “Potential GDP” is Equal to the Growth Rate of the Labor Force Plus the Growth Rate of Productivity

8. Economic “Speed-Limit”

9. Why Do We Care About Unit Labor Costs?

10. What is Unit Labor Costs (ULC)? Definition: ULC = Labor Cost per Unit of Output Measurement: ULC = (Compensation/Hour)/Productivity

11. GDP Revisions Rendered Downward Revisions to Productivity

12. Current Topics Do the Downward Revisions to Productivity Suggest a Lower Trajectory for Potential GDP? Could Measurement Problems Be Providing a Distorted Productivity Picture? What is the Role of Demographics on Potential GDP?

13. Has the “Speed-Limit” Changed With Productivity Revisions: Policy Implications

14. Productivity Measures Only As Good as Output and Hours : The Case of the Missing Hours

15. The Role of the Unauthorized or Illegal Worker

16. Did This Really Happen To Construction Productivity?

17. Excluding Construction Has Productivity Really Slowed?

18. Might An Aging Labor Force Slow the Trajectory of Potential GDP?