Human Resources: Executive Summary:Productivity

The spectacular growth in U.S. productivity experienced in 2002 and 2003 proved hard to maintain in the first three quarters of 2004. The percent change in output per hour in the nonfarm business sector shot up 4.4% annually in both 2002 and 2003. But 2004 productivity paints a more moderate picture, with first- and second-quarter output below 4% and third-quarter output dropping to 1.9%.

While jumps in productivity growth tend to delight business people and economists, who celebrate the fact that workers are producing products and services more efficiently, high productivity can be driven by a variety of factors, not all of them translating into great economic news. For example, in 2001 and 2002, which were years of layoffs and consolidations, productivity growth occurred when work hours declined and output rose only moderately.

Productivity may also hold down job growth, since it allows businesses to do more with fewer workers. Sluggish job growth has, in fact, been a strong trend in recent years. Two years after the 1990 recession began, private-sector employment was down just 0.9%, but two years after the 2001 recession, such employment was down 2.9%. Although some observers point to the offshoring of U.S. service-sector and manufacturing jobs as hindering job recovery, Barry Bosworth, senior fellow at the Brookings Institution, claims that rising productivity is the primary culprit. The good news is that most economists believe that higher productivity helps keep the economy vibrant and will, in the long run, create more jobs.

At least the recent years of high productivity have helped lay to rest the idea of "Baumol's Disease." Decades ago economist William Baumol proposed that since the service sector required the kind of hands-on activities that machines were unlikely to replace, service-sector productivity would rise more slowly than that of the manufacturing sector. But over the last several years, technology has indeed allowed the service sector to boost productivity in ways once thought to be unattainable. Harvard economist Dale Jorgenson likens financial, retail and trade service companies to factories, using technology to search out and eliminate inefficiency. "It is the end of Baumol's disease," he said.

Another factor helping to raise productivity is innovation and the development of more creative work processes. Technical service companies, in particular, are streamlining processes, increasing their use of automation and discovering new ways to reuse established technology, according to a 2004 BusinessWeek article. Scholars estimate that between 1993 and 1996 alone, as much as 89% of the rise in multifactor productivity could be attributed to innovative manufacturing work practices, such as job rotation and performance-based pay.

The real question, in light of recent numbers, is whether the productivity slowdown is a short-term trend or a sign that technology and innovation are done raising productivity rates for now. Some economists hope it's the former, because a short-term decline in productivity may help stimulate more job creation, since companies are less able to expand production without hiring more workers. In the long run, however, the hope is that the U.S. economy will manage to keep productivity growing even while creating jobs. After all, higher productivity enables companies to produce more goods and services at lower costs, so they can afford to pay higher wages without raising prices. Paychecks get bigger along with corporate profits, consumer prices stay steady, and living standards go up - a positive scenario for all.

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The Institute for Corporate Productivity (i4cp, inc.) improves corporate productivity through a combination of research, community, tools and technology focused on the management of human capital. With more than 100 leading organizations as members, including many of the best-known companies in the world, i4cp draws upon one of the industry’s largest and most-experienced research teams and Executives-in-Residence to produce more than 10,000 pages annually of rapid, reliable and respected research and analysis surrounding all facets of the management of people in organizations. Additionally, i4cp identifies and analyzes the upcoming major issues and future trends that are expected to influence workforce productivity and provides member clients with tools and technology to execute leading-edge strategies and "next" practices on these issues and trends. i4cp is a for-profit company with offices in St. Petersburg, Florida.