The Dark Side of the Productivity Surge

The third-quarter productivity numbers show that business is squeezing
more work out of employees in hard times

By Peter Coy Business Week November 5, 2009

Rising productivity is usually one of the best things you can hope
for in an economy. It means people are producing more for each hour
they work. That's the path to higher living standards.

But the huge burst in productivity that the U.S. economy experienced
in the third quarter is not entirely good. In fact, it's a sign
that the U.S. economy is still in a sickly condition-a conclusion
that is likely to be driven home by the latest job-loss figures
release on Nov. 6. Economists who cheered the productivity number
are ignoring the dark side of its sudden growth.

On Nov. 5, the Bureau of Labor Statistics announced that productivity-that
is, output per hour of work-in the non-farm business sector grew
at a 9.5% annual rate in the July-September quarter. That was one
of the three biggest gains in the last 30 years, and it followed a
strong annualized gain of 6.9% in the second quarter.

What could be wrong with that? The problem is how the productivity
growth was achieved. It wasn't because of clever efficiency measures
or the purchase of wonderful tools that help people get their jobs
done faster. Such improvements take years, not mere months. Rather,
it was because companies cut jobs and work hours drastically. Worker
Morale

Work hours fell at a 5% annual rate even as output increased at a
4% rate, the government said. So people working shorter hours had
to do the same amount of work as before, or more. People who kept
their jobs had to pick up the work of ex-colleagues. Many workers
probably put in extra hours that weren't counted in the statistics
in order to get all their work done. That would exaggerate the
output-per-hour gain.

Speedups are rarely good for worker morale. Recent surveys by firms
such as Watson Wyatt and Spherion Staffing Solutions show that
workers are increasingly fed up and are likely to bolt for other
jobs as soon as the economy strengthens and hiring resumes.

What's more, productivity that's achieved through slashing hours
is a negative for the overall economy. Workers who are laid off or
given reduced hours can't afford to spend as much money, so demand
for consumer goods remains soft.

Economists who welcomed the productivity numbers observed that they
should be good for corporate profits. It's true that companies are
getting a bargain.

The government said that unit labor costs-namely, the amount of
money that employers had to pay for each unit of workers' output-fell
3.6% over the past year, "the largest decrease since the series
began in 1948." Bad for Business

The trouble is that with demand so weak, employers may not be able
to enjoy the benefits of those lower unit labor costs, says Paul
Ashworth, senior U.S.

economist for Capital Economics in Toronto. Instead, competition
for scant business may force them to pass along their labor savings
to customers by cutting the prices of their goods and services.
There could be, he says, a vicious cycle of falling prices and
falling wages, worsened by the fact that Americans have huge debt
burdens that loom larger when incomes fall. In a research note,
Ashworth said: "The upshot is that deflation is still by far the
biggest threat."

University of Texas economist James Galbraith, in an e-mail message,
says that "'Productivity' in this situation is a fairly meaningless
construct," adding that the decline in hours "is not good for the
working population." Galbraith said he sees "little reason for
optimism" that economic growth will be strong enough to get employment
back on track anytime soon.

True, it's not wise to read too much into one quarter's numbers.
Economic Policy Institute economist Josh Bivens notes that "productivity
quarterly numbers get really kind of goofy and volatile around
turning points in the economy," such as now. Also, some optimists
argue that higher productivity growth will eventually encourage
companies to do more hiring. "In the second half of 2010 businesses
will accumulate a strong pent-up desire to add more high-quality
workers into their teams," IHS Global Insight (IHS) Chief U.S.

Financial Economist Brian Bethune said in a Nov. 5 report.

But Capital Economics' Ashworth argues that the optimists on
productivity are getting things backwards. The optimistic argument
is that higher productivity will lead to more employment. But he
notes that it was falling employment that caused the higher
productivity in the first place. "People are basically saying the
decline in employment is going to cause more employment," Ashworth
says. And that is not a very good bet.

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