Jobs and Productivity

NYTimes has a nice tutorial to explain the paradox what is happening in the US – the economy is growing, but jobs are not. The reason: a more productive workforce, thanks to the investments in technology. But the question is: will the growth continue without the addition of jobs?

The United States economy has not experienced anything like this since World War II. Normally, a spike in productivity is accompanied by an even greater spike in demand. Simply put, productivity rises when workers produce more and sell more each year, and do so without putting in extra hours. The production part is working just fine. The demand, however, is lacking.

That, in turn, is having nasty repercussions for jobs and incomes. The increase in productivity has allowed many employers to cut payrolls or workers’ hours. Why pay six people to assemble 90 toaster ovens an hour when only four workers are needed to assemble the 60 ovens that can be sold? Better yet, why not speed up the line and cut the four workers to three, each one forced to work faster? But that leaves three workers unemployed, without income and unlikely to buy toaster ovens or much else until they get work again. Gradually, the demand for toaster ovens falls to 50, then 40, and another worker is laid off, or everyone’s hours and pay are cut. And demand falls even more, producing its own negative dynamic.

Consider what happens when demand outstrips productivity. The toaster oven company installs a computer-controlled system that delivers parts for the ovens directly to the assembly line, simplifying the work of the six assemblers enough for them to raise production to 100 ovens an hour. That generates more sales revenue to distribute in wages, not to mention profits. The raises encourage spending, and as the demand for toaster ovens inches up to 110, a seventh person is hired.

Some economists are optimistically making the case that years of investment in information technology are finally paying off in what seems to be a permanently higher productivity growth rate one that will endure even after employers stop squeezing their workers.

Rarely in the past has productivity held up in the absence of robust business investment, which is certainly absent now. What saves the day are the delayed productivity gains from constantly devising new ways to use the huge earlier investment in technology, says Erik Brynjolfsson, an economist at the Sloan School of Management at the Massachusetts Institute of Technology.

“It is as if thousands of invisible factories were built all over America, not made of bricks and mortar but of business processes,” he said. “Now these factories are being pressed into action.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.