The Implications of Declining Productivity

“If demand remains weak, there’s a danger that businesses may try to boost productivity by cutting jobs.” — Paul Dales, American economist, regarding the recent 2011 Q2 productivity drop.

“Nowadays, business is all about productivity—and our folks produce.” — Senator John Hoeven, former governor of North Dakota.

“[If] you don’t have a very motivated working class, it starts to affect the dynamics of the economy. If workers are disenchanted and disenfranchised, productivity losses will go along with that.” — James Sinegal, American businessman, founder and CEO of Costco.

From a business perspective, productivity is defined as the rate at which goods or services are produced per unit of labor. It’s an important measure of corporate success, and, on a wider scale, a primary metric of the overall economic health of a nation.

As a productivity expert, I’ve always been proud of the fact that we Americans are more productive today than we’ve ever been, despite having to face more distractions and, arguably, more difficulties than ever before. But we can’t lose sight of the fact that setbacks occasionally occur, and that they can be rather sobering when they do.

Case in point: according to a government report released on August 8, 2011, American business productivity has declined for two consecutive quarters, for the first time since the end of 2008. The good news is that the second-quarter decline is a bit less than expected: an annual adjusted rate of 0.3% rather than the anticipated 0.9%. The bad news is that 2011’s first-quarter productivity figure, which was originally estimated at 1.8% growth, was revised sharply downward to reflect a productivity drop of 0.6%.

As unsettling as this news may be, it’s not necessarily surprising to those of us paying close attention to the larger economic picture. No single metric exists in a vacuum, after all, and while there’s reason to be optimistic, the other standard measures have been mixed lately. Furthermore, the recent downgrading of the government’s credit rating, and the related debt ceiling issues that briefly paralyzed the Congress, are ample evidence that not everyone is sanguine about the American economy.

Granted, we’ve experienced a minor economic expansion in the past two years—but the positive effects have been mostly limited to businesses, with very little trickledown to individual workers. Indeed, as some observers have pointed out, many businesses were able to post productivity gains from early 2009 to late 2010 only because they had previously cut costs and made do with less. In the process they pared their workforces to the bone, requiring the workers they retained to work longer and harder, often for the same compensation. This growth might have been good for businesses, but it was built on unstable economic ground…and now we’re starting to see the cracks in the walls.

The easy answer to this problem would be to hire more people and redistribute the workload more equitably. Unfortunately, labor costs are sharply higher this year: 2.2% higher in the second quarter of 2011, on top of a 4.8% increase in the first quarter. Basically, workers cost more than ever before; that’s the cost per unit of labor in the productivity equation. Add in rising material costs and a fear that we may soon re-enter recession, and the ultimate result may be even less hiring, which would damage productivity even further. You can see the kind of downward spiral the economy could fall into, if we’re not very careful here.

An ideal solution is hard to spot, especially given that the current economic downturn is global in scale, and government stimulus efforts haven’t been particularly effective thus far. Productivity might experience an upswing if large employers are willing to bite the bullet, step forward, and expand their workforces, allowing overworked employees to recover while others take up the productivity slack. This assumes, of course, that labor costs can be contained—which isn’t necessarily a good thing for workers and their productivity, if it’s even possible.

One bright spot in the current situation is the fact that increased labor costs translate into increased spending power for those who do have jobs. Economists agree that increased consumer spending is necessary to jumpstart the economy. That’s all well and good; but even if it happens, will that be enough to stimulate businesses to increase their hiring?

It’s difficult to say at this point; but if it happens, we can hope that the hiring will feed back on itself, causing more spending, which will generate a need for more employees, and thus more hiring, and so forth. That’s how it’s supposed to work, anyway. If all goes well, productivity would then rise, which might push labor costs down (the two metrics often correlate).

It will be interesting to see how employers react to the news of the productivity drop, because that will certainly affect which direction productivity will go in the next few quarters. You can be sure that I’ll be keeping a close eye on the productivity news—and I’ll just be one among many.

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Comments

  1. In reading this article, all I could think of was … good news, bad news … good news, bad news, good news, bad news … etc.

    “If workers are disenchanted and disenfranchised, productivity losses will go along with that.” — James Sinegal, American businessman, founder and CEO of Costco.

    I think this quote sums up a lot of the problem … disenchanted workers.

    So my question is, how do we re-enchant the workers if all the “good news” doesn’t materialize?

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