For many months, banking and business economists have worried that higher wages in a strong economy would stir up inflation and force the Federal Reserve to raise interest rates.
But inflation has so far remained at bay. One economist thinks he knows why: workers are a lot more productive than they are being given credit for and their wage gains are thus not inflationary.
"I'm convinced that official statistics woefully understate productivity growth," said Edward Yardeni, chief economist at Deutsche Morgan Grenfell Inc., New York.
The question of productivity growth has long been wrapped in mystery because worker output is notoriously difficult to measure.
The issue has been complicated by the relative decline of the manufacturing sector of the economy, where worker output is easiest to gauge, and the rise of the finance, technology, communications, and health care sectors, where productivity is hardest to assess.
"How can we measure the unit output of health care or computer software, for instance?" asked Mr. Yardeni. "We can't. The government's efforts to do so are inadequate."
Indeed, the data gathered by the federal government's Bureau of Labor Statistics has not shown major recent gains in productivity, which is officially defined as unit output per worker-hour.
Mr. Yardeni and two colleagues, Jim Moltz and Terry Gardner Jr., decided to look more closely at business revenues, specifically at sales per employee, to get a better handle on the productivity enigma.
The relevant data have been widely at variance without explanation. From 1987 to 1995, real sales per employee rose a healthy 4.7% per year, on average. That was well beyond the average 1.1% per year average growth in productivity, as officially measured.
The economists constructed sales per employee ratios for the Standard & Poor's 500 companies and all of the S&P industry groups.
They then compared this to a price index used in calculating the nation's gross domestic product, the GDP deflator index for nonfinancial corporate business.
The result: Sales per employee have increased 250% since 1977 while the price index is up less than 100%. Adjusted for prices, real sales per employee are ahead 80% since 1977.
More strikingly, the biggest gains in sales per employee have been in the sectors where output is hardest to measure. Between 1990 and 1995, sales per employee jumped 83.5% in the technology sector, 485% in the health care sector, and 47.4% in the communications area.
Indeed, all 11 S&P industry sectors showed large gains. The smallest improvement was 11.3% in the financial sector.
After adjusting his analysis for possible flaws, Mr. Yardeni concluded that productivity has been growing at least 3% per year since 1987-several times the 1% growth rate in official data.
If this estimation is correct, some recent puzzling aspects of the economy's performance can be better understood. And perhaps a rise in inflation is not imminent.
"In the past, the unemployment rate declined as a business expansion aged," the economist noted. "Tighter labor markets put upward pressure on wages that were not offset by productivity. Rising unit labor costs were the main cause of cost-push inflation.
"To halt rising inflation," Yardeni noted, "the Fed was forced to raise interest rates until the boom turned to bust."
The situation seems different today, he said. "Labor markets are tight, but companies are successfully increasing sales per employee by boosting productivity. The economic sectors that are growing the fastest are also the ones that have demonstrated a remarkable ability to increase their final sales faster than their work force," he said.
Innovation by business may also be playing a much larger role than it's been given credit for.
"Business planners realize that global competitive pressures can squeeze profit margins on new products very quickly," Yardeni said. More companies are devising business strategies "with the goal of having 50% or more of sales attributable to products that didn't exist two to five years ago."
The upshot is that "sales per employee is soaring not just because companies are selling more of their same old products, but also because there are so many different, new products," said Yardeni.