In the short term, productivity improvements will continue to be driven by increased effort or more hours worked (versus those gains brought on by technology investments). Companies have more production to manage and have been reluctant to hire, so employees are working longer days to meet increasing demands.
Old-line analysts are concerned that as the economy improves workers will finally release pent-up frustrations stemming for doing more with less. But unlike the climates of 2001 and 2002, productivity through increased man hours does not necessarily translate into low employee morale.
Companies that recognize this are doing a better job of rewarding productivity through bonus structures. They have to! As more employees are needed, employers have to be willing to compensate at higher levels. Not only that, but they also have to pay more to existing employees to guard against attrition. But that compensation does reflect the productivity gains trend. At least 90 percent of employee bonus programs today are based partially, if not exclusively on company profitability - driven significantly by worker productivity.
Productivity improvements are driven by three factors:
* changes in tools: applying new and better capital, for example in the form of technology;
* changes in effort: inducing employees to increase hours worked or to better focus their efforts); and
* changes in skills: hiring better employees or training existing employees to perform at higher levels.
A recent speech, Federal Reserve Vice Chair Roger Ferguson highlights some interesting statistics about this subject. Over the long run, the U.S. economy has enjoyed average annual productivity gains of approximately 2 percent per year, but that this figure is actually comprised of long periods where productivity increased 1 ½ percent per year punctuated by shorter periods of time with higher productivity gains (like now -- productivity has increased 5 percent per year for the past two years, and since 1995 has averaged about 3 percent).
Ferguson also pointed out that the productivity spurts have historically been associated with increases in technology and capital investment. This might suggest that the "human" part of productivity gains -- either from increased work effort or better skills -- accounts for 1 ½ percent improvement per year. Capital and technology accounts for the rest -- about ½ percent per year on average, but much more in the years in which these improvements or investments are made.
In the short run, productivity improvements are likely to be driven by increased effort (more hours worked) as we have seen this year in the U.S. economy. Personally, I don''t think this is bad for morale. I could make a case that 2001 and 2002 were bad for morale because employees were working, but not getting bonuses, salary increases, the satisfaction that comes from working on a winning team, etc. However, I recognize that at some limit, additional hours can have a negative affect on morale. And this may be somewhat more acute now as people remember back to the 1999/2000 boom, when they worked tremendous hours, and after which there was a dissatisfying decline in the economy -- creating a "you mean I worked my tail off for nothing? -- never again!" sort of attitude.
In the longer run, however, productivity can only be generated by improved technology and more highly skilled employees. This is in part why the opportunity to offshore jobs is so important to global productivity: we can get better employees at lower cost.
I think leading companies do a pretty good job of rewarding productivity -- because they must. As companies need more employees, they have to willing to compensate them at higher levels, and they have to pay more to existing employees to guard against attrition. Most bonus programs are geared to company profitability, which is significantly affected by productivity.
In the end, productivity increases are always good from a macro level, but may be unfortunate for individuals who either have to work more hours or for those displaced by productivity gains. But it is only productivity gains that increase our standard of living.