Why mediocre gdp growth and a strong labor market?

That is the topic of my latest Blooomberg column.  This exercise is speculative, but here is my tentative resolution:

Workers have been undergoing a serious crisis of morale since the pandemic — and they really are doing less. So businesses, in turn, have to hire more of them just to keep pace.

Does this hypothesis fit with these economic signals? With inflation still in the range of 5%, slow economic growth cannot be due to insufficient aggregate demand. More likely, it is due to supply-side and productivity considerations. The biggest natural disaster of the last half decade has been Covid, which damages not capital but labor — whether workers’ health or their morale…

Could part of the explanation be the broader adoption of the work-from-home option? I know there are studies that say WFH increases productivity, but even the author of one of the more widely cited papers says that more research is necessary and that a lot depends on  how well the arrangement is organized. Meanwhile, America is experiencing a mental health crisis, arguably made worse by both Covid stress and the accompanying lockdowns.

The productivity question is even more puzzling. If worker productivity is low, why keep on hiring? The key may be to look not at total productivity, but at productivity per hour — and not per reported hour, but per hour actually worked.

I concede that there exists no measure of productivity per hour actually worked. (The official number, which is not doing great either, measures productivity per reported hour.) But if the average office worker only puts in say two to three hours a day — and it is not implausible — then there is a lot of slack in the worker’s day, especially if they are WFH.

So consider this thought experiment as a possible explanation: You are a manager and have noticed that new hires tend to be more enthusiastic and hard-working than current employees. Under this theory — and that’s all it is —  you decide to hire more contract workers for well-defined, short-run tasks. Meanwhile, you redouble your efforts to bring workers back into the office.

Viewed through an economic lens, it is puzzling why there aren’t more gains from trade. That is, workers agree to put in more effort, and employers agree to pay them more. That is a trend which should be expected — but WFH makes monitoring difficult.

Note this same pattern of mediocre output growth and labor scarcity is evident in many other economies, including Germany and Czechia, as discussed in the column.