Saturday, November 6, 2010

Worker Productivity is Declining...This is GOOD news...However, it is NOT permission to goof off on the job...

WSJ: Cooling Productivity Is the Heat Behind Jobs Figures

""U.S. workers are getting less productive. Right now, that actually may be good news for the labor market...The cooling rate of productivity growth. Output per hour of work in the U.S. rose 2.5% in the third quarter from the same period last year, figures Thursday showed. That is a considerable drop from the first quarter's 6.3% growth rate, the strongest pace in almost five decades. Companies, in other words, now require more hours of work and, ultimately, more workers to keep raising output....""

Productivity is defined as "Output Produced per Labor Hour"...Or more simply, how much "stuff" a worker produces in one hour of work.  After the initial plunge into recession in 2007, worker productivity actually increased significantly in the intervening 3 years.  There are many potential explanations for this. Here are a few of my observations from experience and, well, from relentless reading of professional economists blogs.  I dont pretend to be original...

(1) Fear. Workers busted butt, to use an informal term, to avoid being in line for lay-offs. A Darwinian, survival of the fittest mentality emerges at many work places, especially "blue-collar" or lower-level "cubicle jobs. I have no evidence of this other than the many many many many jobs I have held in my life...

(2) A reduced staff/workforce at a business learns to "do more with less". Daily processes are improved and efficiencies are squeezed out of every last input. I once worked in a warehouse as a temporary worker. The place was SO inefficient it made me crazy. I tactfully cajoled the manager to improve various processes and reduce the amount of time it took to unload trucks and process cargo. Needless to say, they did not need temp workers soon after that (guess I cause unemployment to increase...) The negative consequence of this is people may be over-worked and/or they find that they really had too many people in the first place and with streamlined processes they can do more with less labor (see my example above).

(3) Labor has been replaced with Capital.  Machines, computers, re-designed work-stations, and other production equipment have been employed to save on labor costs.

As we emerge from the recession, as measured by an increasing GDP (tepid as it is, it is increasing none the less), we SHOULD be adding workers to help produce that "stuff".  However, business have been tentative and have been able to keep up with additional demand without adding workers on any significant basis. There HAS to be a breaking point!

As noted in the highlighted paragraph, productivity is taking a dip.  Not because workers are not working as hard, but because they are coming up against productivity wall.  Existing workers, even with improved processes and additional capital, are not able to keep up with additional demand and their productivity may actually decline as they work more hours. This could be a signal to the business that they have milked all they can out of workers and capital and it is necessary to add labor (or capital) to improve productivity.  This is good for the labor market and some economists see this as a positive development.  

This graph accompanys the article above and shows an overall (not perfect) inverse relationship between productivity and employment. If the trend continues, we are in for better days...

Wall Street Journal
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