Tuesday, November 17, 2009

The Productivity Myth

In a speech this week, translated into English for us by Karl Denninger here, Ben Bernanke spoke of recent productivity gains as if they were somehow praiseworthy. Karl translates that into “work harder or die,” but
I have some further thoughts, of course.

Many years ago I was down in Mexico with a friend of mine who was a contractor. We had a sort of informal “guide” with us, and one day the three of us were watching a construction project. I don’t recall, after all these years, the details of the project or the conversation, but “peons” were carrying concrete in buckets up ladders, and there was no construction equipment of any description on the jobsite. There were a hell of a lot of peons. My friend asked why there was no equipment and was told that the government did not permit it; that work was required to be performed by hand. My friend was astonished and declaimed at some length how stupid that was and how he could not make a profit under those circumstances, and finally asked why the government would pass such a stupid law.

“Because,” our guide replied, “the government does not care about the profits of businesses. The government cares that all of these men have jobs and can feed their families."

Our government, obviously, cares about the profits of businesses and so considers increased productivity to be a good thing.

Bernanke said, “It may seem paradoxical that productivity growth--which in the longer term is the most important source of increases in real wages and living standards--can have adverse consequences for employment in the short term.”

He is not alone in believing that productivity leads to “increases in real wages and living standards,” and those who believe that are dead wrong. Collective bargaining leads to increased wages, and productivity growth is one of the levers that the bargainers use to secure those higher wages. Without collective bargaining, productivity growth leads to nothing but increased profit for the employer. Before the advent of collective bargaining represented by labor unions, business made every effort to obtain more production from their workers, and higher wages were never a result.

Henry Ford paying higher wages was the result of an industrial revolution, and he paid those higher wages so that the workers could buy his products. He did not raise wages simply because his workers were producing more product; he did so because he was introducing an entirely new business model. Once that model was established he didn’t raise wages until labor union collective bargaining required him to do so.

Bernanke completes his paradox about the possible adverse consequences of productivity growth, “But, when the demand for goods and services is growing slowly, that may be the case.”

Indeed. Like for the past thirty years when productivity has grown steadily and significantly and the real income of the working man and woman has declined as labor unions have lost ground and the number of workplaces subject to collective bargaining has decreased.

The other myth is that productivity in the long term leads to more jobs, and that one also is completely untrue. Productivity growth by definition leads to fewer jobs. One of the arguments used in the collective bargaining process is fewer jobs; that because there are fewer jobs the business can pay higher wages to each of those fewer jobs.

In a micro sense, a single employer may gain jobs due to productivity growth. With a more competitive product, the employer achieves a bigger market share and grows the business, hiring more workers. Those increased jobs come at the cost of jobs lost at other employers and the overall effect of that productivity growth is jobs lost.

In any case, define the "more jobs" that exist. It may be more than there were to begin, but it is fewer jobs than would exist without the productivity growth. That's not to suggest that we go back to having peons carrying concrete in buckets, but...

In praising productivity, Bernanke is not the working person’s friend.

1 comment:

  1. Arthur11:08 AM

    Actually, I don't think that "going back to having peons carrying concrete in buckets" isn't such a bad idea.