High cost of soaring productivity

The Economy

Living standards raised with a major boost from worker firings

June 13, 1999|By Jay Hancock

THE COUNTRY is producing many more goods and services per person than it was a few years ago. Even some TV reporters can figure out that this is a good thing.

Labor productivity grew at a fabulous yearly rate of 3.5 percent in the first quarter, the government said last week, and by a 2.1 percent pace over the past four years.

That's twice as fast as in the preceding two decades, according to Merrill Lynch & Co. economist Stan Shipley, and it brings us rising wages, low inflation and a healthy stock market.

"Hats off tonight to American workers!" says Dan Rather of CBS News.

What neither Dan nor anybody else talks much about is precisely how American employers got these productivity gains. They fired people. In droves.

Labor productivity, by definition, is making more with fewer people.

That pretty much summarizes corporate America over the past 15 years. From the leveraged buyout sharks of the 1980s to the downsizers of the 1990s, firm management has been all about cutting costs while maintaining or increasing sales. Wages are most companies' biggest costs.

But productivity gains don't just accrue to CEOs, shareholders and other fat cats, although those people are usually first in line.

Workers benefit, too.

While productivity is an output measure, it's also an income statistic. The more fruitful we are with each hour of toil, the more money we make.

Productivity growth is the only reason Americans have indoor toilets and drive Chevrolets instead of living like cavemen. It's why poor Americans live better than the middle class did a century ago. It's why we can feed the country using less than 2 percent of the work force in agriculture, vs. more than half more than a hundred years ago.

Societies with high productivity are rich, long-lived and often happy. Societies with low productivity are poor, sick and often miserable. Even little changes in productivity cause big social effects. Read Jeffrey Madrick's "The End of Affluence" for a fine description of how paltry productivity gains spawned U.S. budget deficits, inflation, poverty and malaise in the 1970s and 1980s.

This is why economists love productivity growth, and it's why news readers make smiley-faces when they tell you about it. But to report productivity growth without explaining how it works is fatuous or cynical.

Last month, ABC's World News Tonight aired a piece called "A Closer Look" at productivity. Reporter Deborah Wang interviewed workers in a Boeing plant in California about cutting paperwork and other assembly costs for the C-17 transport plane. "All the changes are saving the Air Force $7 billion and producing a better plane," she said.

Oops! Deborah forgot to tell people that "the changes" have included 48,000 Boeing layoffs. Look a little closer, ABC.

Sure, layoffs aren't the only way to boost productivity. You can retain workers, crank up output and hope people buy the extra products. But markets aren't that accommodating for every business. How can a country prosper when it keeps wiping out its jobs? Surplus workers from older, established companies are absorbed into new industries where their labor is more valued. And more productive. Unemployed farmers go to work for Henry Ford. Downsized bankers get hired by Internet firms.

And, thanks to big, economy-wide profits from productivity growth, the Fords and the Amazon.coms get the capital they need to grow.

Hence the current 4.2 percent unemployment rate. And cheaper products. And rising personal incomes.

This economy still offers grist for complaint. Poverty persists. Incomes diverge. Stress rules. You can argue about whether workers are reaping their share of productivity gains. You can decide that job security matters more than ever greater wealth, that equality is preferable to growth.

What you can't do is present a PG-13 version of how living standards rise and pretend it's the whole story.

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