The Department of Commerce said the other day that labor productivity in the first quarter of 2002 grew at an annualized rate of 8.6 percent, the fastest quarterly rate of growth in nearly 20 years.
That’s good news, but most media reports on the announcement misinterpreted what is actually going on in the real economy. “Productivity rises as employers sweat more out of existing workers,” said one wire-service story. “Firms squeeze more out of employees,” went another.
Reading such stories, the average citizen might well think that Simon Legree has come back to life and is pacing office and shop floors with his black lash, scourging anyone who falters even briefly from lifting a bale, toting a barrel or logging a customer complaint into the database.
What’s more likely is that fewer people are gathered around the water cooler discussing Brad Radke’s performance or the latest road construction delays. Others are happy they have something real to do and don’t have to spend their days on miscellaneous fixing and painting.
What news reports missed is that this one-quarter productivity increase is a very short-term phenomenon. Labor productivity — goods and services produced compared to hours of labor used — can’t grow at an 8 percent annual rate over an extended period. Dramatic short-term drops or increases, such as the one just reported, are a symptom of the business cycle, not a cause of it.
It’s no accident that the last time we had an increase this high was in 1983, just when we were coming out of the 1982 recession. And the first-quarter drop this year is a complement to the relative drops in productivity registered as the economy slowed in 2001.
Here is how this pattern unfolds in a small firm, say for a residential builder or a job-shop-machining firm:
The economy slows and orders for new homes or machined components fall off. The builder or machine shop starts to lay off workers, starting with the least-difficult-to-replace employees.
But they try to retain their key supervisors, setup specialists and problem solvers. The businesses know that sales will eventually pick up again and that they will need these key skilled employees. They also keep bookkeepers or office managers, who are necessary for the daily running of the firm even when production is slow.
They try to keep the employees they retain busy in some useful activity. The estimator attends a workshop on changes in the building code. The milling machine operators clean and reorganize the stock room. The remaining framers tear down and lubricate the air compressor and their nail guns, take some of the cracked scaffolding to the welding shop for repair. Someone puts up some new paneling in the bathrooms or replaces the cranky reversing switch on the big lathe.
All of this is useful activity but it does not add much to output or GDP. So as the economy slows output per hour worked — as tabulated by the Labor Department — falls. But this is a result of a slowdown, not a cause of it.
When the economy recovers, the process is reversed.
The skilled machinists stop taking inventory in the warehouse and go back to producing machined parts. The carpenters go back to building houses.
Yes, they may be working harder than when they were engaged in “fix-up and spruce-up” busy work, but they’re not necessarily groaning under the lash. In general, employee morale is higher rather than lower as work becomes more meaningful and concerns about being laid off completely melt away with increased orders.
Productivity spurts like the one this past quarter are usually much more the result of a return to a normal work pace than to rapacious employers squeezing the last ounce of energy out of exploited peons.
That is why they don’t tend to last very long.
Long-run increases in productivity come from better-trained workers using better machines. These improvements come from education and research.
Both worker education and improved technology stem from a combination of business sector spending on specific training, or machines and public sector spending on general education and on research and development.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.