Whither Productivity?

May 8, 2003
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Experts agree that the wellspring of a healthy economy is productivity growth. It's what fueled the economic boom of the late 1990s. Measured in output per hours worked, U.S. productivity grew at a galloping 2.6% annualized rate from 1995 to 2000--a sudden jump up from the 1.4% growth rates that had prevailed for more than 20 years prior. One of the liveliest economic debates now is whether productivity can be sustained at that growth level going forward.

So far, despite the recession that began in March 2001, productivity is holding up surprisingly well. Buoyed by a 5.2% jump in last year's fourth quarter, nonfarm productivity for all of 2001 advanced by 1.9%. That's down from 3.3% in 2000, but still remarkable, given that productivity usually declines during recessions.

Where do we go from here? There are lots of theories. One column I read recently suggests that recent mass layoffs at many companies will hurt near-term productivity by depriving surviving employees of their workplace friends who got the ax. The column, by Sue Shellenbarger, in The Wall Street Journal, cites research findings that "having friends in the workplace" was one of 13 employee circumstances most likely to signal a highly productive workplace.

Another recent report predicts that productivity growth will slow later this decade when the Baby Boom generation begins moving beyond its peak earning years. The reason: labor quality will suffer--negatively impacting productivity--because the Generation X group that replaces the Boomers are fewer in number, meaning that more jobs will be filled by younger, less-experienced workers.

Most economists agree that a primary component of the late-1990s productivity surge was falling technology prices, which drove the acquisition by corporate America of more productivity-enhancing systems and equipment. If these trends continue, it bodes well for future productivity performance. Some economists project continuing productivity growth in the 2.25% to 3% range for the 2000s based primarily on that prospect.

Not all are convinced, however. Some question whether technological innovation can continue at the same rapid pace going forward, and even then, whether the same high rates of corporate technology buying will resume once the current downturn is over.

One thing seems certain. In manufacturing, an upgrade from vintage factory equipment to state-of-the-art systems can pay huge productivity dividends, not to mention quality improvements. And those payoffs are getting bigger. A recent study by economists Jason Cummins, of the Federal Reserve Board, and Giovanni Violante, of University College London, found that the gap between the productivity of the most technologically advanced machine and that of the average machine was at 15% in 1975. But by 2000, that gap had jumped to 40%.

There are many ways to boost productivity. But if recent trends hold, spending on new technology and productivity-enhancing equipment for the factory will be an important part of the formula in the years ahead. Companies that don't make the investments may be left behind. As the economy improves, and factory managers evaluate their capital spending plans for the remainder of this year and beyond, that's something they had best keep in mind.

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