Productivity Growth Is Good

If you laid every economist end-to-end, goes the old joke, you would never reach a conclusion. That said, there's remarkable consensus among dismal scientists about the benefits of strong and growing productivity to the U.S. economy. In the simplest terms, productivity growth, such as the 5.9% increase in productivity in the durable-goods manufacturing sector in the first quarter of 2004, gives Americans the ability to consume more, which means the standard of living goes up. Real disposable personal income is higher than it has ever been, confirms William Strauss, senior economist and economic advisor at the Federal Reserve Bank of Chicago. After taxes, after inflation, Americans now enjoy an average annual per capita income rate of $27,000, compared to around $10,000 in the 1960s. Such are the benefits of productivity growth. As the economy bounces back from the most recent recession, quarter after quarter of positive economic numbers only recently began to translate into new jobs. During this prolonged "recovery period," economic observers began to talk about the dark side of strong productivity growth, blaming it for the anemic job creation. Mary Andringa, President and CEO of Vermeer Manufacturing Company, Pella, Iowa, confirms those fears. Because of process improvements and waste-elimination efforts, the maker of construction and agricultural machines is now able to grow without adding people, or at least far fewer. It used to be when sales increased by a hypothetical 10%, the company might add 7% more people. Now, she estimates, they can meet such a demand increase with less than half the number of new hires. Such efficiency improvements are the nature of a competitive market, says Strauss. "As a share of the overall economy, manufacturing as far as jobs goes will become a smaller and smaller share. But I'm extremely optimistic with regard to output. We will continue to produce larger and larger amounts each and every year." He adds, "I don't know where the jobs are going to come from 20 years from now. But I'm certainly reassured, knowing our history, and knowing how we are able to create entire industries very quickly where need be, as well as allow industries that aren't making it any more to go out of business." When asked about the impact of productivity growth on the rate of job creation, Larry Rosenblum, Chief of the Division of Major Sector Productivity at the Bureau of Labor Statistics, takes a long-term view. For a given level of output, he notes, faster productivity growth would indeed mean fewer workers are needed. But output is never constant. "What we've seen over time, if you look at longer periods of time, those industries with faster productivity growth, generally have faster employment growth. We see that pretty consistently," says Rosenblum. For manufacturing this means that while the number of total jobs is trending downward, industries with faster productivity growth are growing -- or at least not shrinking as quickly. Rosenblum is frequently asked about the impact of imports and outsourcing or offshoring on the government's productivity numbers. A car, for example, that's completely imported won't show up in the numbers at all, he says. If a domestic automaker offshores some parts, and the company lets the workers go who used to make those parts and they don't find new jobs, that could show up as faster productivity growth because of the change in hours or inputs. "Despite the fact that this is getting a lot of press and attention, this is not a new phenomenon. [Companies] have been doing this for decades," says Rosenblum. Although it's difficult to identify where manufacturers are buying parts from, he doesn't see that the rate of such purchases of materials and business services has changed much over the past 20 years. "The history of work in the world is that we've been substituting capital for labor for 2,000 years," he observes. From 1948 to 2001, labor productivity grew 2.5% per year on average. Of that, the increases in capital per worker accounted for just over a third of the productivity growth. From 1995 to 2001, this productivity measure increased to 2.7% per year, and capital per worker accounted for over 40% of the growth. The nature of that capital has changed as well. Prior to 1973, Rosenblum reports, almost none of the capital contribution to productivity came from information technology. In the most recent period, almost 80% of capital substitution came from information processing equipment and software.