Productivity: The Gift that Never Stops Giving

In the late 18^th century, the introduction of mass production dramatically increased efficiency and initially eliminated many traditional jobs.  However, it soon produced millions of new jobs.  In the same way, the spread of information technology in the second half of the 20^th century increased both productivity and employment, while expanding the overall size of the economy.

Statistics bear out the persistent growth in output per hour worked.¹ From 1948 to 1970, annual U.S. productivity gains averaged about 2.8 percent compounded.  Then, they slumped to just 1.6 percent per year from 1971 to 1995.  But, starting in 1995, the technology revolution, along with other breakthroughs, drove productivity growth back to about 2.5 percent a year.  It maintained this average right through 2010 — despite two recessions and the extra security costs of the post-9/11 era.

It appears that when the data are all in, 2010 will show an annual productivity gain of around 2.5 percent, which follows annual gains of 3.5 percent in 2009 and 1.1 percent in 2008.

In the era of the Great Recession, when it has seemed as though all economic news was bad news, these positive numbers offer a sharp contrast.  They have been the bright spots in the sea of negative numbers.

One might wonder how productivity can keep increasing when we've been faced with some of the worst business conditions since the Great Depression.

Admittedly, some of the growth stems from outsourcing, especially since 2000, but part of the rise is also due to the implementation of more efficient processes, using both new technology and old-fashioned methods.  It was specifically because of the Great Recession that most corporations were forced to find ways to increase efficiency.  One way was to do more work with fewer employees.

That is the cloud on the current silver lining of productivity growth:  higher unemployment.  Much of the reason productivity rates rose was because companies cut labor as a cost savings measure, but then found ways to maintain output with a smaller workforce — hence, increased productivity.

Even when output fell, the productivity rate grew because the labor force cuts were deeper.  For example, in 2009, there was a decline of 1.5 percent in output, but because this was coupled with a 7.6 percent drop in the number of hours worked,
productivity posted a gain.²

On the global front, world labor productivity growth has increased well beyond 2 percent annually every year since 2000, thanks largely to big emerging economies.To read the full article, you must be a Trends Magazine Subscriber. To learn more, click here