Doing more with less has benefits and drawbacks

Is labor productivity a friend or a job-killer? As with a lot of things in economics, the answer is a little bit of both.

We are all urged to be more productive, and we all want that, most of the time. And we believe that productivity is a good thing. The shortage of jobs, though, has people thinking about all of productivity’s effects, even the negative ones.

The Bureau of Labor Statistics keeps track of productivity in our economy, and in addition to its regular reports, they publish a series of analytical papers called “Behind the Numbers,” where they explain where the numbers came from and what they mean.

A recent report in that series, “What Can Labor Productivity Tell Us about the U.S. Economy?” authored by Shawn Sprague, provides the definition of productivity that the bureau uses to measure it: “Labor productivity is defined as real output per labor hour and growth in labor productivity is measured as the change in this ratio over time.”

It is easiest to think of productivity in terms of physical output. If workers are able to pick 80 bushels of apples per hour and a new machine results in their picking 160 bushels we can see that their physical productivity doubled.

Labor productivity is easiest to measure in the sectors of the economy that have a tangible, physical output, such as the agriculture, manufacturing and mining industries. It is equally important in the non-physical, service industries, though.

The economists and statisticians who want to look at the U.S. economy as a whole have to do more than look at physical productivity for labor because the traditional areas where physical output was king — agriculture, manufacturing, etc. — no longer dominate our economy. The service sector is the largest in our economy now, and measuring its productivity is in making comparisons over time.

It is precisely that capability to make comparisons over time that allowed the report’s look at U.S. labor productivity over the past sixty six years. When we look at the chart tracking labor productivity over the decades since World War II, the most striking thing is how consistent the growth has been.

Sprague puts productivity growth into a more recent context, writing that, “workers in the U.S. business sector worked virtually the same number of hours in 2013 as they had in 1998 — approximately 194 billion labor hours.” That is remarkable in itself, considering that our population grew by about 40 million during those fifteen years.

Even more remarkable, though, was that, “… American businesses still managed to produce 31 percent — or $3.5 trillion — more output in 2013 than they had in 1998, even after adjusting for inflation.”

Beyond the scope of the bureau’s report itself, the idea that the average U.S. worker is nearly a third more productive than the average worker in 1998 is really surprising, considering that we are basically the same kind of marvelous, hopelessly flawed human beings that we were fifteen years ago. We don’t seem any smarter than we were or more highly motivated. So what is the secret?

A large part of it is in technological change and the product, marketing and organizational changes it gives birth to. In the business sector the information technology changes have increased the productivity of workers and managers immensely — so much so that layoffs often have little or no effect on output.

Technological change is underwritten by capital, and most of productivity growth can be traced to capital investment and the efficiency of capital markets.

If we wondered for a moment about what happened to the 40 million people we added to our population, though we get a sense of the puzzle that productivity growth presents. If the number of hours worked doesn’t change, that means that full time employment doesn’t change either, so even when we look at just the adults within that 40 million, we’ve got more people than full time jobs. Can that be traced back to productivity growth too?

The answer is yes. Technological change destroys jobs and capital, but it is the driving force of capitalism, economic growth and prosperity. But it is also a source of constant economic and social turbulence in the economy and in our lives.

As an economic policy we should be insuring that the positive, creative side of capitalism is encouraged to add new businesses and new jobs. Instead we currently seem to be pursuing a defensive strategy, based on the idea that we can provide enough public assistance and government control to fool or force the economy into growing faster. There’s got to be a place where that makes sense, but I’m not sure we want to go there.

James McCusker is a Bothell economist, educator and consultant. He writes a monthly column for the Herald Business Journal.

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