The Trouble with Productivity

Nov. 19, 2003
improved technology and higher productivity should be a good thing, right?

When you talk to anyone about business these days, the topic inevitably turns to the condition of the economy. But now that there is a growing general perception that the economy is starting to turn upward, a topic we’re starting to hear more about is jobs, especially their losses and their scarcity.

The current unemployment rate is 6.1 percent, having peaked in this recession at 6.4 percent this past June. Historically speaking, the current jobless rate is only moderately poor. In the string of recessions we’ve had since World War II, unemployment has, at times, been far worse -- 10.8 percent in November 1982 and 9.0 percent in May 1975. There are a couple other worse rates on record as well.

What’s alarming is that the jobless rate has not improved over the last few years despite an increase in Gross Domestic Product. This means that our economy is able to produce goods and services, and even grow, with fewer workers required per unit of output. I am not sure how they can accurately calculate these things, but one estimate I saw placed productivity growth in the U.S. at 1.4 percent annually between 1980 and 1995. But between 1995 and 2002, productivity growth averaged a whopping 2.6 percent per year. In the second quarter of this year that number shot up to 7 percent.

In short, we’re more productive than we used to be, mostly because our economy has done a good job of integrating technological innovation and improvements onto our shop floors and offices.

So improved technology and higher productivity should be a good thing, right?

In the long run, yes.

In the short run, however, we’ve got problems that won’t easily disappear. You can’t rack up productivity numbers like that without eventually showing some major dislocations in your workforce, and especially so when those numbers come as the economy is eroding. In the past, high jobless rates were overcome by 1-2 percent improvements in GDP. But now, economists are suggesting that it takes higher GDP growth (in the range of 2.5 - 3.0 percent) than previously to reduce unemployment -- an obvious effect of the workforce’s higher productivity.

If you couple this with the fact that America’s manufacturing jobs have, of late, been among its principle exports because of policies and regulations that affect our competitiveness, you’ve got a situation that is unique when compared to previous recessions.

In the case of this industry those jobs have emigrated to places like China, India, Mexico, Japan, Brazil, and Eastern Europe. Lots of service sector jobs have also been exported, but the average manufacturing job lost paid better than its service counterpart and required a higher level of skill to perform. As a result, our economy suffers a greater loss when a manufacturing job is cut than when a service job is.

Some economists suggest our economy is only experiencing the pains of a maturing economy in shedding old jobs for new ones. This may be so, but I don’t see where the new jobs are coming from. And even if that is what’s happening, I am not in favor of any policy that accepts a net loss in manufacturing jobs for a net gain in fast food workers, telemarketers, financial analysts, and day traders.

Unless things change soon, expect jobs to perhaps be the primary domestic issue during the presidential campaign and election of 2004.