Productivity Still The Enemy Of Job Creation

The relationship between productivity and job creation is a complex one–at least as seen through the eyes of economists. It is based on a simple question: how long can companies squeeze additional work out of their employees before they have to hire new workers to create products and services to grow their businesses?  In hard economic times, companies may not need to add workers at all to help sales because sales are not improving.

Productivity has made great gains through most of the recession, although the improvement stumbled in the second quarter. That setback may be temporary. Prominent economist Daniel Wilson of the San Francisco Federal Reserve has made a compelling case that productivity could continue to rise for several more quarters.

Wilson said in a recent paper, “looking at the observable factors underlying recent productivity growth and the patterns of productivity over past recessions and recoveries, a sharp slowdown appears unlikely.”

He adds:

Evidence that capital utilization is an important and possibly the primary factor behind the recent strength in productivity growth has important implications for the sustainability of that growth going forward. Although measures of capital utilization have grown rapidly during the recovery to date, they are still well below their historical averages. That suggests there is plenty of room for further increases in capital utilization over the next several quarters. Such increases could lead to continued strong productivity growth for the next year or so, posing an important risk to the strength of the labor market recovery

Companies, in other words, can invest in resources that improve productivity just as they can press  employees to work harder.

The capital utilization argument may be true, but it is incomplete. It may be difficult to measure the extent to which companies push workers to be more productive, but the economic environment is such that people with jobs will work harder in most cases to keep them because they know that new work is hard to find. Companies can also press productivity by using part-time workers who “cost less” than those who work full-time and receive benefits.

It does not matter what has caused productivity to improve during the recession or what will continue to do so in the near-term. Whether it is capital or the leverage that employers have over their workers, the trend means that job creation is still far off in the future.

Douglas A. McIntyre