Next Wednesday's labour market figures are likely to confirm the message of last month's. They showed that total hours worked are now growing more slowly than GDP, implying a rise in output per worker. In the third quarter, hours worked rose only 0.1 per cent while GDP grew 0.7 per cent. This implies productivity growth of 0.6 per cent, which is above the average growth seen in the 30 years before 2008.
Having fallen between 2008 and 2014, therefore, it now seems that productivity is recovering.
History suggests this could be good for equities because more often than not, shares do well when productivity grows well. Since 1974 there has been a statistically significant correlation (of 0.29) between three-yearly growth in output per hour and real returns on the All-Share index. Strong productivity growth in the mid 80s and mid and late 90s saw good returns on shares. And falls in productivity in the late 70s, early 90s and late 00s were all accompanied by poor returns.
There's a simple reason for this. Quite simply, more output per worker means higher profits per worker.
There is, though, a social cost to productivity growth. In the short-term, it keeps unemployment high simply because firms respond to rising output by increasing efficiency or by working existing staff harder rather than by hiring more workers.
From shareholders' point of view, however, this is a good thing. High unemployment will help curb wage demands which would prevent workers from grabbing a bigger slice of the growing pie. Historically, the share of wages in GDP has tended to fall when productivity has grown strongly.
Better still, if wage growth is offset by productivity gains then unit costs will not grow, which means inflation will stay low. That will hold interest rates down, which in turn will prolong the expansion.
In this sense, the resumption of productivity growth should have a double benefit for equities. It means not only higher corporate earnings, but also higher valuations as investors anticipate continued growth.
