Productivity and Layoffs

One reason I like reading Brad DeLong is that he’s never afraid to admit a mistake — even when it isn’t technically a mistake, just a question of interpretation. Here is his comment on productivity growth of 9.5% (annual rate) in the third quarter:

“Back in the 1930s there was a Polish Marxist economist, Michel Kalecki, who argued that recessions were functional for the ruling class and for capitalism because they created excess supply of labor, forced workers to work harder to keep their jobs, and so produced a rise in the rate of relative surplus-value.

“For thirty years, ever since I got into this business, I have been mocking Michel Kalecki. I have been pointing out that recessions see a much sharper fall in profits than in wages. I have been saying that the pace of work slows in recessions–that employers are more concerned with keeping valuable employees in their value chains than using a temporary high level of unemployment to squeeze greater work effort out of their workers.

“I don’t think that I can mock Michel Kalecki any more, ever again.”

Productivity is the amount of output per unit of input. The productivity numbers you see quoted in the media are almost always growth in labor productivity — the rate at which the amount of output per unit of labor input (hour worked by a human being). In the long term, productivity growth is perhaps the most central component of rising material standards of living, since in aggregate it means that we get more stuff for working the same amount of time. (GDP growth on its own doesn’t have this effect, because the population could be growing, or we could be working harder and thereby losing leisure time.)

In the short term, though, productivity growth can swing all over the map. Productivity often falls during a recession because output falls faster than companies lay off workers and spikes afterward because output is growing right while companies are laying off workers (and companies put off hiring until the recovery is well underway). This time the recession lasted long enough that companies had time to lay off millions of workers and productivity growth started shooting up in the second quarter (6.9% annual rate).

One underlying issue is that not everyone in a company contributes at the same rate. When companies have layoffs, they theoretically try to lay off the less-productive people (although this often does not happen), which should cause productivity to go up. Having been a management consultant for several large companies, I can say with a fair degree of confidence that these companies could have laid off a significant number of people without any noticeable fall in output. In addition, because the rate of output today depends in a complex way on work done in previous quarters (imagine if GM laid off all its design people — the factories could keep humming for a while), sometimes you can keep output up even with less labor input in the current quarter; you don’t pay the bill until later. Then there’s the effect DeLong talks about: companies can use a bad labor market as a way to squeeze workers harder. This is why quarter-to-quarter numbers can be very noisy.

However, repeated layoffs don’t work as a long-term strategy, and at some point you reach a point where you can’t sustain output with fewer people, and companies start hiring again. So in the long term, productivity growth relies on things like improvements in technology and business processes.But in the short term it’s often just noise.

By James Kwak

24 responses to “Productivity and Layoffs

  1. Hours worked by whom? Output of what? Productivity is one of those concepts that can mean anything but usually mean nothing. America is a nation of people and each of them normally must eat every day. What do your number say about how this is going?

  2. I think the gradual erosion of worker rights also applies; since there are almost none now, the effect described by Kalecki takes place, in prior recessions there were enough rights for workers that employers couldn’t squeeze as effectively.

  3. Are moving jobs out of the US measured? I’m sure the companies in question are deemed more ‘productive’ in the wake of moving jobs off shore.

  4. Yes, I agree with you. “Productivity” is extremely vague. I guess they have to give it some kind of precise meaning to get a number out of it, but it probably can’t mean very much beyond something very general.
    For example, I’ve seen big claims made about the relation between IT and productivity, but unless you’re talking about very specific, well-defined industries, it’s, in my opinion, just too vague and ill-defined to mean anything at all.

  5. By saying something general, I mean, “lots of workers have been laid-off, so more stuff is being made with fewer people”. And that’s really about all you conclude.

  6. “One reason I like reading Brad DeLong is that he’s never afraid to admit a mistake — even when it isn’t technically a mistake, just a question of interpretation.”

    This is a joke right? Complaints of him deleting critical comments flood the internet, from both liberal and conservative sites.

  7. Most sectors are behind the curve. The type of blatant and disgusting exploitation has been alive and well in this country for decades…Where? one might ask? Academia – in biomedical research squeezing workers and graduate students until they drop of exhaustion is the norm. Has been since the late 80s/early 90s. The ability to exploit like that comes from either a lack of labor rights or a perceived lack of said rights.

    That sector has been functioning with the majority of grad students, post-docs and technicians from countries like China, India and Pakistan. At first they didn’t KNOW any better so they did whatever they were told. that included sleeping on the laboratory floor. We can learn from that example exactly where we are going if this type of exploitation continues unchecked. It is not a pretty place.

    There is a backlash however. I said “at first they didn’t know any better.” Now, many of them are just plain mad. Quite a few are returning to China and India where – guess what – working conditions and the standard of living afforded them are BETTER.

  8. According to income statistics it is only the top 1/2 % of us have apparently been productive – the rest of us have been getting what we deserve(nothing).

  9. Technology and innovation (creative ways to organize and use new technologies) fuel job growth. Look, for instance, at the number of computer-related jobs in the 1950′s versus today. R&D is the first segment to dry up in a bad economy and the last to come back. If government is to stimulate job growth it would be well advised to invest in new technologies and their uses collaboratively with our educational institutions and private sector. Unfortunately, this is a long-term fix, not short-term. If treated as such, however, it could become a tool to ameliorate the impact of economic downturns on job growth.

  10. I’m seeing it first-hand.

    Last year, we didn’t have any layoffs but in the middle of this year, we lost 6 (out of 70). When a co-worker left a few weeks ago, she wasn’t replaced and her workload was distributed amongst everyone else.

    Last month, I worked 50+ hours overtime. How much of that was personal greed and how much was it fear of being replaced if I didn’t work overtime? I can’t say. I don’t believe in self-reporting as a tool.

    I do know that rumors abounded about how the people “laid off” were not pulling their weight, ergo, “goodbye.” I also know that when my co-worker left, we thought they’d get at least one person back from being laid off. That didn’t happen. They simply expected us to increase productivity.

  11. Possibly, but if he let’s *my* comments through, the filter can’t be set too terribly high.

  12. A complementary explanation to the “exploitation” of current workers is the other side of the coin: the potential productivity gains over the past 15 years were much higher than we knew, and, absent an economic shock, employment stickiness due to a number of factors (including manager agency cost) would have continued to leave them on the table.

  13. On the micro level, during a recession each industry and each business cuts whichever costs they can as revenue declines, and many businesses and industries are labor-intensive and can have large fluctuations over the business cycle, while others don’t. So, we get fluctuations in the aggregate productivity readings. On the macro level, we have seen a secular shift over the last thirty years (which Greenspan famously used to “explain” why inflation has been low by 1970′s standards) to the accelerated use of technology in place of human labor, which has produced a long-term rise in average “productivity” across multiple cycles. This is very good for real profits, which have skyrocketed during this thirty-year period; real wages have actually declined, as average employment was maintained for a while by more jobs have been created in service than in manufacturing industries. Not surprising that profits did better than wages, since “productivity” means more product to sell with fewer person-hours to pay for. You don’t have to project this secular trend very far to see the flaw in the theoretical assumption (stated as economic law, as usual) that “increasing productivity is the means to attain increasing standards of living”. As long as “standards of living” are measured such that vastly increased wealth from profits derived from “productivity” gains drag up the arithmetical mean of average income and average consumption includes purchases made by the hourly-wage workers loading up with debt, we can expect this “miracle of productivity” to continue on paper. The image of everybody being a two-fisted entrepreneur or coupon-cutting capitalist, while machines do all the actual production (and provide the actual services) is not just unrealistic, it’s absolutely perverse in its fantasy of a “disappearing” working class.

  14. “However, repeated layoffs don’t work as a long-term strategy, and at some point you reach a point where you can’t sustain output with fewer people, and companies start hiring again. So in the long term, productivity growth relies on things like improvements in technology and business processes.But in the short term it’s often just noise.”

    Are you sure about that? What if layoffs lead to less demand? Then the company cuts output.

  15. Productivity is a simple measure. Like most economic aggegates it is approximate, unfair, and over-general.

    Unfortunately, most views of complex systems are limited by the fact that even very smart humans are very stupid by any sort of objective measure. (Size of short term memory, speed of computation, errors per unit time or quantity, systematic perceptual and judgment errors etc…) So if we’re going to understand something complex we need to break it down into pieces that stupid apes can digest.

    Following this guideline, productivity is no different. GDP/hours worked

  16. All sounds too complex for me. Marx talked about the competition between workers and how capitalists exploit that fact. Greenspan paraphrases Marx , talking about the inability of workers to win wage increases “exasperated by the global economy.”Kalecki was around when industry was labor intense , now we’ve
    innovated our way into a capital intense manufacturing country where most new jobs are in low wage service sector jobs where there isn’t much productivity improvement since they are not making things.Productivity in the capital intense manufacturing sector may be going up but we would have to reward the robots for much of that.

  17. Actually, I believe that there is a really interesting reason for the rise in productivity. It relies on the idea that most employers believe that this downturn is going to be long-lived, AND that they will have a substantial number of highly qualified people to employ on either a temporary or contract basis at substantial reductions in the cost of full time staff. So, the are all working in the MARGINS. That would be very smart, since the likelihood of having a really strong economy is at least four to ten years away, and, as long as it is weak, they can keep the marginal employment cheap by not hiring full time permanent staff.

    I am sure that many of the full time permanent employees are also accepting stagnant or even lower income in exchange for keeping their jobs, and hoping to make up the difference later.

    None of this is surprising at all.

  18. Per the NYTimes article….official government measures of productivity are very inaccurate. http://www.nytimes.com/2009/11/09/business/economy/09econ.html?bl

    I know it’s hard to believe that the government would not be able to accurately measure productivity after the scintillating performance they’ve turned in with regulating large banks, financial firms, credit rating agencies, etc.

  19. For what’s going to happen to those “highly qualified” people absent single payer, see Ellen’s story here.

  20. There is also the R&D hit. R&D expenses don’t directly show up today on the output side, but expenses generally show up today. While I thought of this a while back regarding outsourcing, Michael Mandel hits it with a more trained fist:
    http://www.businessweek.com/the_thread/economicsunbound/archives/2009/11/_financial_cris.html

  21. winstongator – both the Businessweek article and the NYT article get at the same issue. The government cannot accurately measure what products and services are produced/provided by US workers, so instead it captures productivity gains from jobs that have been offshored. Instead of making the American worker feel good about how much he/she is producing the productivity statistics really are a huge, red flag signalling an ever increasing US business strategy of outsourcing more and more types of jobs. And with so many more service related jobs going offshore…accounting, banking back office, IT, HR, research, etc. added to the manufacturing jobs that were offshored in the past, the statistics only become more and more inaccurate. Here are 2 paragraphs from the NYT article that show the appallingly inaccurate state of US prductivity statistics.

    “But the statistical system is not yet up to the task of sorting out which components are made here, which are made overseas and the resulting impact on employment. As Lori G. Kletzer, an economist at the University of California, Santa Cruz, put it, “We don’t know what jobs have been offshored.”

    “The same holds for services. An accounting firm in New York with 50 employees outsources some of its functions to less expensive accountants in India: the paperwork on an income tax return, for example. That work comes back to New York by computer transmission and is billed at New York rates, as if it were value added in this country.”

  22. Govt had no desire to do a good job of regulation, so they did a bad job. It’s amazing how your real goal affects your outcome.

    NASA is a govt agency and they send men to the f-ing moon, launch satellites, operate a space station. If we can do these things, relatively speaking well, we can measure productivity or regulate banks.

  23. De Long has absolutely no ethics when it comes to filtering comments. He doesn’t just delete what he dislikes. Once he modified my comment and left my name under it. I’ve only left a few comments on his blog in posts dealing with world politics and he censored them all although I simply mentioned undisputable facts or quoted opinions he disagreed with, always from credible and respected sources.

    Much as I respect him as an economist he is simply too sensitive to contradiction to be a good blogger.

  24. Eagle — So true. Happened to me twice. And I went to grad school with Brad and was simply adding my opinion and questioning some of his facts. My comment was deleted within an hour, all three times. Bizarre.