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November 08, 2002

Why Productivity Gains are a Bad Sign

Many economists are marvelling that productivity, how much is produced per worker per hour, is increasing in a recession. Usually during slack times, productivity falls.

But this is hardly the good news that folks like Brad Delong argue. In the past, businesses were reluctant to fire people during recessions, even as their sales slipped, so workers had to be somewhat idled until the lean times passed.

Now, as this NY Times article details, businesses have embraced the "just in time" economy to mean they should fire workers as soon as sales slip, leaving the remaining workers to work harder. In the summer, layoffs and productivity increases went up together-- productivity zoomed up 8.8 percent in non-farm businesses, and hours worked dropped 4 percent. By October, layoffs in industrial goods areas were accelerating even more.

And even the workers not laid off are gaining little from the increased work loaded onto them:

The bulk of savings and profits achieved by higher productivity appears to be flowing to owners and shareholders. In the last 12 months, the Labor Department reported, inflation-adjusted compensation for workers increased 1.7 percent, on an hourly basis, though their productivity shot up 5.3 percent.
In the short-term, such productivity gains are allowing companies to keep profit rates up while actually feeding recession as fewer and fewer workers have jobs and the money to buy goods.

In the long run, productivity increases can theoretically feed better lives by increasing the total pie created by the workforce, but only if the productivity comes from real efficiency, not just extra dog labor piled up on too few employees.

Some of the productivity growth now may actually be improvements in efficiency, but to the extent that it's just fear of layoffs making employees sweat faster and harder to increase corporate profits, there's little good news in these numbers.

Posted by Nathan at November 8, 2002 08:44 AM

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Glad you said that. Most economists, even the nice ones, have a natural bias against labor, since in economics labor is a cost and if the labor cost of something is zero that is a good thing.

I've been there myself. I was in a unit of 3.6 FTE which was reduced to one person, me, who was given a very small raise. A few tasks were spun off and modernization eliminated others, but my stress level multiplied by ten. I didn't have a good night's sleep for a year.

My manager was one of those people whose every single word comes from Utopian futurological New Age self-help management handbooks.

Posted by: zizka at November 8, 2002 12:09 PM

yes, nathan, glad you brought this up... i blogged about the worker productivity increase, but only to note it. you have brought what it meant into focus.

i was on the other end of zizka's situation. i was fired after 10 years of writing and producing radio comedy, and my work was dumped on my assistant, who not only got no raise, but was summarily fired about a year after me.

worker productivity increase only means that workers are forced to be more productive because the number of workers is being reduced, so you'd better do the fired guy's work or join him in the unemployment line!

Posted by: skippy at November 8, 2002 09:43 PM

That can only explain productivity growth in the short run. In the long run, you run out of workers to fire, or your workers are already exerting the maximum effort; then no more productivity growth that way is possible.

It's possible that these numbers are simply a result of people working harder, but they are in line with the underlying trend since 1996, so it's equally possible that the same technological forces working before the recession are still working now.

Posted by: Walt at November 9, 2002 02:23 AM

It's true that if the productivity numbers hold up over time, it's got to be more than just sweating workers. No doubt there is something to the new technology helping, but I am skeptical of any productivity numbers tied to a time of large layoffs.

Posted by: Nathan Newman at November 9, 2002 05:48 AM

I agree that there are a lot of strange things going on on the labor side in this recession: mammoth increases in labor productivity... unexpectedly sharp declines relative to trend in the official labor force...

But it is not as clear to me as it is to Nathan that labor hoarding by firms is a thing of the past...

Posted by: Brad DeLong at November 11, 2002 09:00 PM

One side-effect of this sort of labour productivity gain: if the economy *does* pick up, companies who have maxed out their remaining workers won't have the capacity to increase output without hiring new, and presumably untrained, staff. In most jobs, training is carried out by experienced staff taking the new hires in hand; but when the experienced staff are working flat-out, there simply isn't time for this. (Been there, done that, in a growing dot-com where I was holding a department together by the skin of my teeth and didn't have *time* to show the new hires management was throwing at me how to help.)

These companies are ultimately not only making the recession worse by reducing the number of active consumers; they're making it harder for themselves to dig their way out.

Posted by: Charlie Stross at November 12, 2002 06:06 AM

Don't forget the maybe-oversimplified-but-not-immediately-dismissable (MOSBNID!!) calculation: job growth comes in the gap between productivity growth and economic growth.

That is, if the GDP grows by 3% and productivity grows by 3%, then at a first pass you don't overall need any more workers.

Since it's such a religious issue with the Chicago School that Europeans are lazy welfare-loving worthless bastards, the fact that German productivity growth may have a hell of a lot to do with German unemployment is not considered a polite subject to discuss.

Posted by: a different chris at November 12, 2002 09:26 AM

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