What happens to labor productivity and the economy when it’s always someone’s first day at work

No one’s first day of work is easy. Whether you’re working in an office, at home, in a restaurant or at a work site, you don’t know where anything is, you don’t know who to ask for help, and tasks start piling up that you don’t know how to complete. And it’s not easy on your co-workers either: When you have to ask where something is, who you should talk to for permission to do something or even where the coffee is, you’re taking time from your co-worker’s job.

This normally isn’t a major issue: The rates by which people leave and start new jobs often stay fairly steady or, in the case of types of work that are seasonal, can be fairly predictable. But these are not normal times. Overall employment has fluctuated by tens of millions of jobs in the past two-and-a-half years, and the rates at which people are leaving and starting new jobs are historically high.

A new economic theory is emerging pulling these two data points together: What if the entire economy is having its first day at work?

What the data tells us about productivity

“Despite the strong labor market, economic activity has slowed down; that’s entirely on labor productivity,” Fatih Karahan, a former Federal Reserve economist, told Grid.

Still, overall productivity is slightly higher than it was before covid.

What he found was that leisure and hospitality, retail and nondurable goods manufacturing — i.e., industries like restaurants, hotels, clothing stores and food processing — had both more turbulence in employment as well as large declines in productivity. Transportation and warehousing, which includes travel, also had a substantial fall in productivity compared with other sectors. “The sectors that suffered larger declines in labor productivity are the ones that saw larger increases in quits rate,” Karahan said, “A lot of the jobs now in the economy are new jobs. That’s historically unprecedented.”

CEOs are starting to cite turnover as a reason for poor customer experiences

When it comes to explaining disappointing or low productivity to analysts, company executives agree: Letting go of and hiring workers en masse can be a crimp on productivity.

In a call with analysts in July, Delta Air Lines Chief Executive Ed Bastian noted that the company had hired 18,000 new workers in the past year and a half, putting the airline 5 percent short of its pre-covid employment levels, but, he noted, 15 percent short of its 2019 capacity. The reason? Not that they can’t find workers, but instead issues around “training and experience,” as well as covid-related issues affecting the availability of crew and having to pay out more overtime. “You don’t step into these jobs and you learn it overnight,” he said. “There’s a significant learning factor.”

Bastian said in July that the airline had at any given time 1,500 pilots in training and some waiting to be trained: “There’s a backup there as well in the process. So it really impacts your overall productivity and efficiency.”

These issues around training and operations aren’t restricted to airlines but seem to be popping up across the economy, especially in jobs that require in-person service and had some of the biggest layoffs during covid and the biggest surges in the past year.

The chief executive of the foods services giant Sysco said on an earnings call last week, “Roughly half of our supply chain associates have been with the company for under a year. And it’s that point, that point alone, that results in a productivity rate that is below, therefore, our historical average. These are challenging jobs. They’re skilled labor positions, and it takes time for someone to move up the productivity curve.”

But finding and keeping employees to make those custom beverages — especially amid a union campaign — can crimp the profitability of Starbucks, which declined in North America in its most recent quarter, “primarily due to ongoing inflationary headwinds, labor investments, including enhanced store partner wages and new partner training support costs, partially offset by pricing,” Chief Financial Officer Rachel Ruggeri said.

“We also increased barista training, basically doubling the hours for new hire baristas to 40 hours, as well as our new supervisors,” John Culver, the company’s chief operating officer, said.

Shake Shack is suffering from similar productivity problems. “Staffing pressures and elevated turnover remain a headwind to our sales and margin performance as new team members take time to get trained and to optimize throughput and high volume Shacks at peak periods,” Chief Financial Officer Katie Fogerty said in an earnings call earlier this month.

Turnover seems like a plausible explanation but may not be the whole story

It’s not entirely clear that the difficulties with bringing on new workers are entirely responsible for the decline in productivity so far this year, even if there have been real declines in productivity within firms that have had to do a lot of hiring.

Nicholas Bloom, a Stanford University economist who has extensively studied productivity, especially during the pandemic, told Grid in an email that “high-frequency BLS numbers are not that reliable. If you look at the overall figures since the outset of the pandemic it looks like about a 1% increase in labor force productivity which is the same as the 1% growth rates pre-pandemic. So the pandemic has left productivity growth almost unchanged.”

However, he noted that companies who had to do a lot of hiring have experienced a decline in productivity should not be surprising: “If you hire a lot of employees very fast it is hard to rapidly integrate them all,” Bloom said.

“The pace of hiring has been so high over the past six months and even before that, and the rate of turnover is so rapid,” said Adam Ozimek, the chief economist of the Economic Innovation Group. “Employers are dealing with an extraordinarily high percentage of new workers. The onboarding process takes time and is a drain on productivity. If you have a new worker on something a little bit complex, it takes time for workers to be creating value on net.”