The Truth About Employment and Productivity

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The Truth About Employment and Productivity

Since 2000, the U.S. industries with the highest productivity growth rates have experienced big job losses.  These industries include computers, related electronics, and other industries based on information technology.

At the same time, sectors with increased employment, such as the health sector, have shown lower productivity growth rates.  This has led some analysts to conclude that we’ve traded jobs for productivity and profits.  What are we to make of this situation?

Since 1929, every 10-year rolling period has experienced increases in both productivity and employment.  Furthermore, for nearly 50 years, beginning in 1960, both labor and productivity contributed nearly equally to annual growth in GDP.  This evidence suggests it’s wrong to conclude that increasing productivity has destroyed jobs, at least historically.

But, is it possible that something has changed?  Are current increases in productivity responsible for the reduction in employment?  Will growth in productivity over the next few decades lead to massive unemployment?  A close look at the factors that lie behind the current surge in productivity indicate that the answer is “no.”

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At the end of the past decade, as the recession hit and business activity dropped, companies cut their workforces.  When the economy began to warm up, there were many uncertainties associated with having a larger workforce — like potential new healthcare costs and additional regulations.  These uncertainties discouraged companies from rehiring the people they had laid off.

Instead, companies discovered ways to do more with fewer workers.  One of these ways was choosing capital expenditures over added manpower.  So, the addition of new and better equipment and technology drove productivity even higher. 

The recent striking imbalance between productivity and hiring in the U.S. is an anomaly when compared to what we see in other rich industrialized nations, as well as in America’s own history.  In the past, when U.S. business faced “slowdowns,” they held on to workers.  Wanting to retain valuable employees and their skills for when business turned around, businesses kept them on the payrolls doing “make-work jobs,” such as plant maintenance.  This obviously had a negative effect on productivity.

In the current recession, this is the model Japan and Europe have continued to follow.  As a result, at the depth of the recession in 2009, Japan experienced a 3.7 percent drop in productivity and Europe experienced a 2...

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