Thursday, March 06, 2008

Productivity Myths

In recent editorials and articles about the economy everything is negative except one, all the markers are falling except one. Productivity is improving. Mosty that that is reported as “the one bright spot” in the economy.

A very brief course in economics for those who may not know; productivity is a measure of the number of hours of work required to produce output. The output may be a manufactured product, it may be the accumulation of knowledge (something like a research paper), it may be administrative work such as billing and accounting...

An improvement in productivity means that more output is achieved in the same amout of hours, or that the amount of work is reduced to accomplish the same task. Oversimplified just a bit, it means that workers of all types get more work done in less time. To an enormous degree, increased productivity is achieved by capital investment in equipment, and lately computers have played a very big role.

Like anything else in this universe productivity is intrinsically neither good or evil in and of itself. Rain is bad if you’re having a picnic, but can be good if you’re a farmer. If, that is, it comes at the right time and in the right amount.

In a growing economy with an expanding market, increased productivity is likely to be a good thing, pretty much across the board. In any economy improved productivity will have a beneficial effect on the profits of business. But in a shrinking economy or a fixed market, increased productivity will almost certainly mean that fewer people are feeding their families and not, perhaps, feeding them better food.

Many years ago I was in Mexico with a friend of mine who was a contractor. We were watching a construction project on which peons were carrying concrete up ladders in buckets, and my friend said something to the local guy who was with us about bring his cranes down and doing the job for less money. The local guy told us that cranes were not allowed on construction jobs by law, that no heavy equipment was. My friend was astounded and asked why such a crazy law would be enacted.

“The government does not care about the costs of the contractor,” the guy said, “they want to be sure that all of the peons can feed their families.”

A few productivity myths, and some of its less-than-useful effects:

Increased productivity does not lead to higher wages, ever.

Collective bargaining is what leads to higher wages. Increased productivity is one of the leverages used in that bargaining but by itself, absent the motivation of the bargaining process, increased productivity has no influence on wages whatever.

Historically, wages and productivity have risen in unison, but that was during the times that labor unions had a strong position. More recently, while productivity has continued to increase, wages have not kept pace. The reason has quite simply been the loss of influence that labor unions have suffered. It was collective bargaining that was increasing wages, and when bargaining diminished with the loss of labor union influence, wage increases diminished as well.

Increased productivity often results in fewer jobs

In an ideal world, increased productivity would result in increased output and a lower cost product which would lead, in turn, to increased market penetration and entry into new markets. The number of jobs would remain the same, or even increase. It pretty much never works out that way.

Every new machine or computer I ever saw justified in 20 years of industry experience was accompanied by “labor saving” arguments. Laying off workers is one hell of a lot easier, faster and more certain than penetrating or entering markets.

Increased productivity often does not lead to better quality jobs

In fact, the reverse is true in many cases today. When layoffs are made for economic reasons these days the workload does not decrease and the work that was being done by those who were laid off is not eliminated, it is merely dumped onto those who remain in addition to the work they were already doing. The employer benefits from the improved productivity, but the workers who remain are subjected to greater stress for the same pay.

Productivity stifles competition

In China today, if someone wants to start a new toy factory all he needs to do is find an empty building and go out and hire about a zillion people. China has very low productivity standards, and uses many people to produce goods. Low capital investment encourages competition.

In this country, starting a toy factory is a lot more difficult. We have very high productivity standards and so the entrepreneur would need to raise a great deal of capital to obtain the production equipment needed to build the toy factory. Large capital requirements discourage competition.

Productivity stifles innovation

Products in this country change slowly and by only small increments. This is not because we lack the ability to be creative in design, but because the retooling of production lines is too costly.

Additionally, as described in the next effect, money needed for research and development is often diverted to productivity enhancement instead.

Productivity freezes capital

Capital is a resource, and not an unlimited one. To some degree investing that capital for the purpose of obtaining increased productivity is useful, but at some point it becomes self-defeating. Capital which is invested in productivity enhancement cannot be used to build roads, bridges and water treatment plants and (as mentioned earlier) it cannot be used in research and development.

We should view productivity as a mixed blessing.

Our nation would be better served if economic pundits quit worshipping productivity as if it were some sort of god, and put it into balance with the rest of the economic formula. It appears to me that in the economy as it exists today the goal of increased productivity is not something fondly to be desired.


  1. Anonymous12:46 PM

    Good points about the basics of productivity. Increased productivity = more work in less time or less effort. Less effort is supposed to translate to more work in the same time, but doesn't always. It can also mean less exaustion on the part of the person/machine doing the work, thus they/it can work longer /faster /with less resources (ie, less fuel or fewer personnel).

    More & better equipment has made many jobs vastly more efficient (computers, modern farming, robotics to name a few), and thus have raised productivity. Better tools and equipment often does lead to "better quality" jobs - faster, safer, cleaner to name a few points. But better tools is only one leg of a stool - you also need a good environment, enlightened management as well (to name a couple). The reality is of course that the same level of productivity is spread among fewer people, with all the accomanying problems. And they rarely get anything for it, except that they "saved their jobs".

    A shrinking economy means less produced, not necessarily less productivity. In reality, what usually happens is that there are the same resources producing more output or less resources producing the same output. If you have shrinking output, your're in deeper trouble anyway. "Less resources" typically means fewer people employed, but it could mean the same number of people employed but at lower wages. Either way, yes it means less money going back into the economy and a lower standard of living. And people costs (wages, benefits, services,etc) almost always are higher long term than anything else. Thus, easier to get rid of people = instant savings. And all too frequently, higher stock value & bonus for the executives, damn them. But that's perhaps another thread...

    I disagree (at least in principle) of what you said about {Increased productivity does not lead to higher wages, ever.} Time honored tradition states that better/more work = more $. I have personally been in situations where increasing my productivity and work accomplished resulted in promotions and increases in wages. So I disagree with your statement insamuch that it is an absolute. What about the assembly line that Henry Ford implememnted and paid factory workers an astounding wage (for that time)? Increased productivity and increased wages... I do agree that collective bargaining is certainly an incentive and influence in the wage bargaining process (strength in numbers). And yes, union influence has diminished in recent history. It used to be more manufacturing now increasingly government workers.

    {Productivity stifles competition} also has governmental oversight (and meddling) written all over it. Your example China also has lax health, safety, environmental controls, thus they can operate at lower costs and sell at lower price. It's not just capital investure that's a factor here. ANd this also stifles innovation, because of the bureaucratic overhead, not just re-tooling production lines.

    Of course, equipment costs money, which has to come from somewhere. Capital is not infinite (although politicians seem to think it is). If you're talking capital for increased productivity vs infrastructure (roads, water treatment), my first thought is that you're comparing business capital vs governmental responsibility, which is not in the same category.

    Investing capital in resources to perform the job (whatever it may be) faster, safer, more efficient, more environmentally sound is admirable and in many cases necessary. I don't agree with the self-defeating statement, I would say that there is a issue of diminishing returns, to a point where it is not effective to throw more money at it. Yes, that may be splitting hairs, sorry.

    Increased productivity is simply one factor in the overall economy, and as such, is not to be glorified as a single point of aiming toward. As with so many other things in society today, single points are very rare. Look at it in a whole-body approach.

  2. What about the assembly line that Henry Ford implememnted and paid factory workers an astounding wage (for that time)?
    He did not pay them that wage due to their productivity. He paid them that wage so that they could buy his cars.

    The "time honored tradition" is that unions have caused increased wages, and that business has demanded increased productividy as a trade-off. The diminishment of labor unions and loss of wage increases is not a mere coincidence.

    If you produce more for me the goodness of my heart would dictate for me that I pay you more. Business has no "goodness of heart." Productivity has gained in the past dozen years while wages have stagnated. Show me where productivity causes wages increases.

  3. Anonymous12:09 AM

    Also made them productive to lower the price of the car so anyone could buy it.

    I gave the productive = more $ thing to point out that there are exceptions to your absolutist statement.

    There were reports of a factory owner that kept the employees (paid) on the payroll after a factory fire, and the employess wer every loyal to him. Oh and the japanese car factories here have workers that typically reject unionization efforts.

    In general, yes I tend to agree with you on this subject, but there are exceptions.