Wednesday, March 31, 2010

Productivity and Employment

From the Washington Post:

When workers become more efficient, it's normally a good thing. But lately, it has acted as a powerful brake on job creation. And the question of whether the recent surge in productivity has run its course is the key to whether job growth is finally poised to take off.

One of the great surprises of the economic downturn that began 27 months ago is this: Businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek.

That means high-level gains in productivity -- which in the long run is the key to a higher standard of living but in the short run contributes to sky-high unemployment. So long as employers can squeeze dramatically higher output from every worker, they won't need to hire again despite the growing economy.


Businesses have certainly not been investing in new equipment that might enable workers to be more efficient -- capital expenditures plummeted during the recession and are rebounding slowly. And the structural shifts occurring in the economy are so profound that one would expect productivity to be lower, rather than higher, as people need new training to work in parts of the economy that are growing, such as exports and the clean-energy sector.


Instead companies squeezed more work out of remaining employees, accounting for a 3.8 percent boost in worker productivity in 2009, the best in seven years. Which raises the question: Why couldn't companies have achieved those gains back when the economy was in better shape? The answer to that may lie on the other side of the equation -- employees.

Workers were in a panic of their own in 2009. Fearful of losing their jobs, people seem to have become more willing to stretch themselves to the limit to get more done in any given hour of work. And they have been tolerant of furloughs and cutbacks in hours, which in better times would drive them to find a new employer. This has given companies the leeway to cut back without the fear of losing valuable employees for good.

First, consider charts:

The percent change in overall business output since the beginning of 2009 has been on the rebound, turning positive in about mid-2009.

At the same time we say an overall increase in output, we also saw a big spike in the output per hour of person.

So - why is this happening now? I think the last paragraph nailed the real reason: panic. People were looking around themselves and noticing that companies were really cutting back. Then they saw the national unemployment numbers and became extremely grateful for having a job. At this point, employers realized they could really push people hard and expect little to no blow back (people leaving/come type of confrontation etc..).

What's important to note is this set of circumstances can't be duplicated; they are unique to the economy as it currently exists. When we start to see less labor market slack, more consecutive periods of growth and lower unemployment, this situation will slowly disappear.