Productivity gains versus employment

[Milacron]

Increasing productivity has been good for business but worrisome for employment numbers ever since the dawn of the industrial revolution...so the below story is nothing new...or is it ? I seem to recall that even with increasing productivity in one business, another industry or service sector seems to spring up because of that increase.

After all, when we were at less than 5 percent unemployment just a year or two ago, we were infinitely more "productive" than we were in 1900... such that unemployment should have been at 30 percent or worse if productivity was the major factor in employment numbers.

But I can't recall the particulars of the increased productivity effects on new job creation. I'd be interested in reading studies or a book that covers that very dilemma...anyone know of such they could point me toward ?

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Productivity gains may be bad news for job seekers

Nov. 5, 2009
By MARTIN CRUTSINGER and CHRISTOPHER S. RUGABER, AP Economics Writer Martin Crutsinger And Christopher S. Rugaber, Ap Economics Writer

WASHINGTON – Companies across the economy are finding ways to do more with fewer workers, dimming hopes that hiring will take off anytime soon.
Employers became leaner and more efficient in the third quarter. Wages, meantime, remain flat or falling. The result is that productivity — output per hour of work — jumped at the fastest pace in six years.
The good news for companies, though, is bad news for the jobless. As long as companies can get their workers to produce more, they have little reason to hire — at least until consumer spending picks up. And the squeeze on incomes could depress consumer spending, putting the economic recovery at risk.
Productivity rose at an annual rate of 9.5 percent in the July-September quarter, the Labor Department said Thursday. That was much better than the 6.4 percent gain economists had expected. Unit labor costs fell at a 5.2 percent rate.
Still, while companies aren't doing much hiring, they're also not cutting as many workers. The number of newly laid-off workers filing claims for unemployment benefits last week fell to the lowest level in 10 months
The 9.5 percent productivity rise followed a 6.9 percent surge in the second quarter and was the fastest since a 9.7 percent increase in the third quarter of 2003.
The gain reflected that the overall economy, as measured by the gross domestic product, grew for the first time in a year — at an annual rate of 3.5 percent. The higher output came as companies continued to lay off workers. That meant employers produced more with fewer workers.
The 5.2 percent drop in unit labor costs marked the third straight decline and was larger than the 4 percent decrease economists were expecting.
Productivity is the key ingredient to rising living standards. It lets companies pay their workers higher wages. The increases are financed by the increased output rather than higher costs for products.
But companies this year, struggling to cope with the longest recession since the 1930s, have boosted output while continuing to lay off workers. The falling labor costs also reflect that many workers still fortunate enough to have jobs have seen their wages squeezed as companies struggle to bolster their bottom lines.
In a separate report, the Labor Department said first-time claims for jobless benefits last week fell by 20,000 to a seasonally adjusted 512,000. That's better than economists' estimates of 523,000.
Economists closely watch initial claims, which are considered a gauge of the pace of layoffs and an indication of employers' willingness to hire new workers.
On Wall Street, the better-than-expected jobless claims report and news that retailers posted their second straight month of sales gains in October buoyed investors. The Dow Jones industrial average added about 180 points in morning trading, and broader indexes also gained.
The four-week average of jobless claims, which smooths fluctuations, dropped to 523,750, its ninth straight decline. That's 135,000 below the peak for the recession, reached in early April.
Despite the improvement, initial claims remain well above the roughly 400,000 that economists say will signal job creation.
Another 4.1 million people claimed extended unemployment benefits in the week ended Oct. 17, the latest data available, an increase of about 100,000 from the previous week. Congress has added 53 weeks of emergency aid on top of the 26 weeks typically provided by states.
Still, as roughly 7,000 Americans run out of extended benefits every day, the House is expected to approve legislation that would add another 14 to 20 weeks. The Senate unanimously approved a similar proposal Wednesday.

The National Employment Law Project, an advocacy group, estimates that up to 1.3 million people would exhaust their benefits without the extension.
Economists expect the nation lost a net total of 175,000 jobs last month, adding to the 7.2 million lost since the recession began in December 2007. And many expect the jobless rate could rise as high as 10.5 percent before the recovery gains enough steam to start pushing it down next summer.
Layoffs have continued this week. Microsoft Corp. said it was cutting 800 more jobs at its facilities worldwide. That comes on top of the 5,000 layoffs the software giant announced in January.
Johnson & Johnson said it could cut up to 8,300 jobs as part of a restructuring and Sprint Nextel Corp., the nation's third largest wireless provider, said it planned to trim "dozens" of jobs from its wholesale division amid a drop in customers.
Economic growth could slow early next year as various government stimulus programs wind down, analysts say. That uncertainty has made many employers reluctant to hire and households contending with more layoffs, stagnant wages and depleted savings. But the Federal Reserve pledged Wednesday to continue to keep interest rates low for an "extended period," a commitment central bank policymakers can make because wage and general inflation pressures have vanished during the downturn.

[Mark H]

I served my apprenticeship in a Mold shop. About a year in, the Big Boss buys a CNC sinker with a tool changer. 6 months later, he buys another one, same make and model.
The little SOB, Son Of the Boss, makes his rounds one morning saying that these two new sinkers will cut workforce by 30%, and we all better watch out. Two years later, the parking lot has to be made bigger to park the cars of the new hires that came in over the next 2 years. This, IMO represents true growth brought about by increased productivity.

I'm not an economic expert, but I'm hearing about a jobless recovery, brought about by the 1.5 trillion bailout/stimulous brought about by our last two administrations. That much pork has got to make a difference in the US economy, but it's artificial, there's no lasting work.

In the early 1900's we were an agriculture based economy. The industrial revolution came, and we became a manufacturing based economy. Now we have oodles of bailout/stimulous money floating, but what's the next thing to carry the economy?

When the bailout money is gone, the economy will continue to slide, aggravated by a persistently increasing unemployment rate.

I hope I'm wrong.

Mark H

[Milacron]

Originally Posted by Mark H

I served my apprenticeship in a Mold shop. About a year in, the Big Boss buys a CNC sinker with a tool changer. 6 months later, he buys another one, same make and model.
The little SOB, Son Of the Boss, makes his rounds one morning saying that these two new sinkers will cut workforce by 30%, and we all better watch out. Two years later, the parking lot has to be made bigger to park the cars of the new hires that came in over the next 2 years. This, IMO represents true growth brought about by increased productivity.

But that particular case could just represent simply more orders coming in that have nothing to do with productivity.

[The Energy Rebel]

Originally Posted by Milacron

Increasing productivity has been good for business but worrisome for employment numbers ever since the dawn of the industrial revolution...so the below story is nothing new...or is it ? I seem to recall that even with increasing productivity in one business, another industry or service sector seems to spring up because of that increase.

After all, when we were at less than 5 percent unemployment just a year or two ago, we were infinitely more "productive" than we were in 1900... such that unemployment should have been at 30 percent or worse if productivity was the major factor in employment numbers.

But I can't recall the particulars of the increased productivity effects on new job creation. I'd be interested in reading studies or a book that covers that very dilemma...anyone know of such they could point me toward ?

You know, that's a good question.
I don't know if there's a book with the answer but my guess is that there are examples of both results that we've all seen in real life.

Part of this increase in productivity could be the result of a lot of "dead weight", particularly in management, that has been getting pruned.

[GeneT]

In theory, greater productivity means greater value produced per man hour and therefore lower prices. Said lower prices drive demand which in turn creates new positions. To some extent or another it has worked that way in the past.

GsT

[jabezkin]

In 1900 it was about 90% production and 10% service jobs.

It had just about reversed by the end of the century.

[Milacron]

Originally Posted by GeneT

In theory, greater productivity means greater value produced per man hour and therefore lower prices. Said lower prices drive demand which in turn creates new positions. To some extent or another it has worked that way in the past.

Sounds plausable...now, who has studied this in great detail...anyone ? The "Freakonomics" boys might cover this sort of thing in homespun fashion, but I'd be interested in a dull university grade thesis on this as well.

[Boris]

One of the overlooked contibutions to increased productivity is the unpaid overtime issue among salaried staff

If you are in fear of losing your job and your boss wants you to put in 4 hrs extra on top of your paid 40 hrs are you brave enough to say "No" ?

Pretty soon 4hrs unpaid overtime becomes the norm and then begins to rise and you have a 5 man engineering team doing 48 hrs of work time of which they get paid for 40

So you have a rise in productivity purely by a 5 man team doing the work of 6, then 1 gets cut to reduce costs.......

On the shop floor, it is the improvment in machining technology that provides the productivity per man rise.
Lets face it.... 1 skilled capstan setter and 5 operators aint never going to beat 1 skilled setter and a Citizen L20 sliding head lathe with a magazine bar feeder for cost per part
Which is the situation all engineering companies are facing.
so the unskilled machine operators are being given the boot and replaced by machines that dont need the unskilled anymore.
Eg I work in a 17 man shop and we make more money and parts than we did 25 years ago with a 40 strong workforce.
The future... well I have no crystal ball, but manufacturing employment will continue to decline but the decline will level off leaving a highly technically qualified bunch of engineers and machine setters producing parts at a faster rate than anyone 50 years ago could believe*

Boris

*That or we'll be using star trek replicators

[cncmek]

I'm sure this will provoke a dope slap, but I have a thought on some of the recent increase in productivity with fewer people. You won't read it in a paper, book or thesis though, it would be by word of mouth or direct observation mostly.

There is a LOT of people out there scared of losing there jobs and are working like dogs to keep theirs. So employers are getting more out of the workforce.

This is not sustainable though, the folks will burn out soon. I feel you will see an uptick in the employment numbers as the people working thier asses off to keep a place going burn out and have to be replaced by more than one to keep the current levels up.

It may also stay stagnant due to the places with a few doing the work of many folding and those that are able to stay afloat having to replace the burn outs with others.

Being that I'm in a position to see first hand what's going on all over the US that's my observation on the current situation.

I'm also one of those guys working like a dog with reduced manpower because I got to feed my family also and there's not a lot options out there.

I would to hear if any else sees or feels something similar is happening out there.

Take care and good luck all,

Dave

[bryan_machine]

Milacron:

1. This sort of think is studied in macro economics. I have two recent textbooks, highly recommended, neither of which I've yet read. They are:

Principles of Macroeconomics
N. Gregory Mankiw

(Considered difficult but strong.)

Modern Principles: Macroeconomics
Tyler Cown, Alex Tabarrok
(they write a good blog)

Both books have chapter headings and other quick-visit content that says they address this issue.


2. Employment numbers, productivity numbers, GDP, etc. are all time delayed reports of very gross economy wide phenomenon. So figuring out what they really mean w.r.t. interactions and cause and effect can be quite difficult.

3. Population is growing. The labor force is growing with it, but not 1 for 1 (growth in people of retirement age, etc.) I've heard various economists suggest that the US economy needs about 115K to 150K new jobs per month (or per quarter) just to maintain a stable level of unemployment.

4. Because we don't live in a susbsistence economy, full employment in the face of rising productivity requires rising standards of wealth. That is, if *everybody* decides to pursue a "simple life" (spending as little and consuming as little as possible) the economy will collapse.

As a more practical matter, the economy is largely driven by providing products (goods and services) to people. If people "feel poor" - because they are poor, or they fear they will be poor, consumption will fall.

We've had a kind of orgy of consumption fueled in part by unsustainable debt levels, which was supported in part by goofiness in the R.E. markets.
Meaning that consumers *as a whole* have a lot of debt, and so will tend to spend less.


5. In spite of a couple of college courses in it, it only recently became super clear to me that economics is, like the most basic of physics, descriptive, not proscriptive. And there is more work to do on it.

[jim rozen]

"That is, if *everybody* decides to pursue a "simple life" (spending as little and consuming as little as possible) the economy will collapse."

Consider an alternative viewpoint - one not explicitly mentioned in the article, but
inherent in its message I think - that everybody isn't 'pursuing a simple life' but
rather are cutting back on consumption.

For the simple reasons that their wages are stagnant or falling (as the article
mentions) or they are being laid off from their jobs and not hired elsewhere (as
the article mentions) or they have less time to consume because they're
working longer hours (as the article mentions).

I can't figure out if companies are just dense or they really believe in the tooth
fairy. But if they fire bunches of workers, and cut the wages of the rest, can
they *really* be suprised that nobody's out there buying stuff?

Productivity gains are great. But who ya gonna sell all that stuff to, unless you
ship it overseas?

????

Jim

[Mark H]

Milicron, Maybe increased productivity brought about better prices for molds. Better prices could have increased the number of molds built.

I've seen it through out my career, automation, tool changers, unattended operation, etc. have all brought about increased orders.
I'm sure there's a point of diminishing return, I thought it may have been solid modeling, but that turned out to be a horrific learning curve.

Maybe I misunderstood your point.

Mark H

[Tom1]

This has been a fear of industry for a long long time. I have a book from a 1912 Hartness turret lathe. One of the first chapters discusses that the employees should not fear the new machine as it will not take away jobs, rather create new and different jobs. Same went for NC machines, some workers tried hard to prevent them from getting into plants...

[jim rozen]

John Henry and the steam drill, eh?

Jim

[doug6949]

Originally Posted by Boris

If you are in fear of losing your job and your boss wants you to put in 4 hrs extra on top of your paid 40 hrs are you brave enough to say "No" ?

Pretty soon 4hrs unpaid overtime becomes the norm and then begins to rise and you have a 5 man engineering team doing 48 hrs of work time of which they get paid for 40

That's been standard practice here since the early 80's. But 48 hrs? I wish. My first job out of college was with a company that would fire you if you worked less than 50 hrs on a slow week.

On more than one occasion they put entire departments on mandatory 70 hours, 7 days a week and this would last as long a 3 months. No overtime pay of course.

[John in CA]

This may not be true across industry as a whole, but where I work the decision to invest in measures to increase productivity is driven only by extreme upticks in demand for a product. IOW, by the time the decision is made to seriously tool up, we can all rest assured that the demand is so high that it's going to take the new equipment AND all the manpower we can muster to keep up. Do those others of you in production environments find this to be typical?

[MetaRinka]

In the welding world, there always was the pervasive fear that robots will take the place of welders as they do have some advantages in repeatability of very hard mechanical motions.

However in practice I was quoted that for every robot it replaces about .1 Jobs That is if you had 10 robots you could expect to reduce personnel by one.

mind you the employees would probably no longer carry the title and pay of a welder but would not be people working as technicians fixing, maintaining and programming the robots, and people working the low end helper jobs loading parts and such.

The overall increase in productivity has shot up in the last 20 years namely because of the increased use of personal computers. Think about trying to do something like print layout or drafting, or even sending files to multiple branches.

It's not necessarily harmful unless your in a low skilled labor position that can be easily replaced by "smarter" machinery.

[dp]

Originally Posted by Boris

One of the overlooked contibutions to increased productivity is the unpaid overtime issue among salaried staff

If you are in fear of losing your job and your boss wants you to put in 4 hrs extra on top of your paid 40 hrs are you brave enough to say "No" ?

Pretty soon 4hrs unpaid overtime becomes the norm and then begins to rise and you have a 5 man engineering team doing 48 hrs of work time of which they get paid for 40

That isn't an increase in productivity - it is an increase in output at the same rate of productivity. From a front office perspective it is an increase in profit because people are working for free, or translated, there has been a reduction in effective wages.

[bryan_machine]

dp makes a good point, and it's one of the problems with the global productivity numbers, which are based on product (in dollars) versus labor (in *reported* hours or dollars.)

One huge issue (which clouds inflation as well) is that measuring product in dollars tends to mask the point that in *real* terms most things are getting cheaper, or better for the same real price.

This feeds into the productivity versus jobs issue - 10 automated welders, perhaps 9 people where before there were 10. But how many weldments, of what quality, with what predictability of timeliness, were produced? So maybe they replaced more than 1 welder, because to make the same output would have required 20. But maybe that's pointless because you could never have sold the output of 20 welders at the prior labor burden, while you can easily that output with the lower labor burden.


Likewise, GDP counts things that are practical to reliably count, and depends a lot on various samples. Likewise unemployment - which is why unemployment sometimes hops around.

metarinka:
"It's not necessarily harmful unless your in a low skilled labor position that can be easily replaced by "smarter" machinery." = That is the pattern of the last couple of hundred years.

[PeteM]

The usual sequence of improved productivity is:

1) The company/nation with the highest productivity gets the work. For a while this stimulates additional employment for the best producers, up until demand for the product/service at lower prices has been satisfied. That's how the US took manufacturing jobs from much of the world half a century or more ago, and how the Japanese, Koreans, Chinese etc. have taken them since.

2) Once demand has been satisfied, employment goes down. Higher agricultural productivity meant fewer farm workers decades ago. Higher manufacturing productivity means fewer manufacturing jobs (as a % of the workforce) today. Even in China, manufacturing jobs have been displaced by more productive processes.

3) The next step is supposed to be that we find something else to invest our spare labor and talent in. The candidates today are things like biotechnology, virtual worlds, etc. etc.

The reality, IMO, is that we're now in a sort of double or triple bind. We've already lost manufacturing supremacy -- even in CNC programming competitions the winners are from Asia not the US. More recently, consumer demand has tanked. And, as far as those next great jobs go, we're underinvesting in the education and infrastructure to emerge as world champions.

Michael Porter wrote some of the classics in this area (competitive advantage), though now somewhat dated.