QandO

March 23, 2004

Productivity and Jobs
Posted by McQ

Everyone's been asking, "If this is a recovery, where are all the jobs?"

Well as some have been saying, but being largely ignored, many of the jobs have been absorbed in productivity.

American workers are the most productive workers in the world. There's an upside to that which most are familiar with, but there's also a downside to it in terms of jobs. Much of our productivity comes at the expense of jobs.

Business Week put a number to that this week:

A one-percentage-point increase in annual productivity growth costs about 1.3 million jobs.

Ah ha! you say. So if we've lost 2.7 million jobs since the recession, then they could possibly be productivity losses?

Yes.

...the continued ability of U.S. companies to squeeze out productivity gains on the order of 5% annually, since the recession ended, is having a far greater impact on the jobs picture.

"But wait", you say. If productivity gains are in the realm of 5% annually, and every percentage point means 1.3 million jobs, shouldn't that mean a loss of 6.5 million jobs annually?

Yes again. And that's about what we've seen. But here's the kicker. We've recovered all but 2.7 million. Chances are, though, that we'll not recover those 2.7 million anytime soon though. Mostly because those are the net result of increased productivity when all the jobs created since the recession are added back in. In other words, they're not going to be filled ... ever. They're gone.

The problem isn't in the overall number of jobs eliminated; they are running no higher than in past cycles. Instead, far fewer jobs are being created to replace those lost in the job market's churning than would usually be the case. The implication: More of the productivity gains seen during and after the 2001 recession are permanent. Unusually strong productivity also partly explains why other labor market indicators, especially weekly claims for jobless benefits, have tended to overproject job growth.

Now that doesn't mean that we're in a negative job cycle, where because of productivity we'll continue to lose net jobs. Again, entrepreneurship (jobs exist today which were unimaginable 10 years ago), insourcing and expansion of existing business will continue to create jobs. But because of productivity increases, NOT at the rate we've seen in the past.

"What about outsourcing?", you ask. "Isn't it a big factor in the job losses we've seen".

Not really.

Which comes back to the vexing issue of outsourcing. No one doubts that it is having an impact -- though exactly how strong is hard to say since good numbers are unavailable. While some put the number higher, Forrester Research Inc. estimates that of the 2.7 million jobs lost in the last three years, only 300,000 have been from outsourcing.

Which moves us into employment trends. Some factors.

As for companies considering hiring, they increasingly face a situation that has long plagued their European rivals: The soaring cost of employee benefits is making companies increasingly hesitant to add workers unless absolutely needed. Benefits costs, fueled by sky-high health-care premiums and the need to restore underfunded pension plans, are up 6.5% from a year ago. After adjusting for inflation, that's the fastest clip on record. If a company can get three people to do the work of four, that's one less health-care premium it has to pay.

Headcount costs. The cost of hiring new employees is becoming a major factor in looking at outsourcing and other means of using labor in production, such as ...

Increased use of temps also reflects the new flexibility of the U.S. workforce. Instead of "just-in-time" inventory management, companies are now talking about "just-in-time" labor. However, that increased flexibility, along with rapid technological change, is what facilitates the process of creative destruction -- destroying jobs in the short term but making the economy stronger over the long haul.

Bottom line ... the employment picture appears to have changed ... forever.

Why? Because productivity increases mean the ability to stay and compete for a business. The recent technological productivity gains have given business that ability. So the trend toward increased productivity will remain while businesess look at the least costly alternatives in terms of the factors of production with which to remain competetive. This means a change in how as well as in the numbers of those they employ.

The bright lining? As mentioned earlier, innovation creates jobs. The creative destruction touched on above means that even as productivity picks up in maturing industries, cutting-edge and new industries will be creating job opportunities as they transition from theoretical to reality.

Oh ... and the political bottom line? It doesn't matter what John Kerry promises in terms of jobs ... he can't deliver. What we're now seeing are the results of various industries and markets learning to work better and smarter (i.e. cheaper) through technology. Kerry's best move would be to back off and let the "creative destruction" continue.

All he can do is throw a monky-wrench into the works, and that's precisely what I'm afraid he would do to assuage his union special-interests.

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