Saturday, August 29, 2009

Productivity and Jobs

America’s annual gain in productivity in many sectors of the economy is often overlooked as a source of saving. Productivity is measured by output per work hour and the gain in productivity is measured by the percentage increase in output per work hour.

If productivity in appliance manufacturing goes up 3 percent, then a 3 percent increase in appliance manufacturing takes place at the same cost, or the same output can be produced with a 3 percent cost savings, or a combination. The manufacturing firm is the first beneficiary of the savings from a productivity increase because it lowers costs and the savings translates into profits.

Selling extra output puts downward pressure on prices because it is almost always necessary to lower price to sell more output, including appliances. In this way a productivity increase can generate savings for consumers from lower prices.

Productivity also affects employment. If a price decrease leads to a 3 percent increase in appliance sales following a 3 percent increase in productivity, then employment will remain the same.

However, there could be more than, or less than, a 3 percent increase in appliance sales. If it’s more than 3 percent, then more jobs will be needed and employment will go up, but if it’s less, then layoffs result. The newly unemployed will have to look for work at other firms or other industries.

Whenever productivity goes up there are savings with potential benefits for business owners as higher profits, consumers as lower prices, and job holders as more jobs and higher wages. In the 1980’s advances in computer technologies raised productivity so much that business earned new profits, consumers saved with falling prices, and new jobs opened up as business competition for workers with computer skills raised wages and employment.

National productivity continues to go up across many industries, but lately at modest rates. How the savings from productivity are distributed varies, but working Americans are in the worst position to benefit. For nearly 20 years manufacturing productivity and sales have been going up but jobs in manufacturing have been going down. As people leave manufacturing for other jobs they flood service sector job markets.

With a growing percentage of Americans looking for work in service industries, it gets harder and harder for labor to share in productivity gains with better wages. For industries like health care and education where productivity gains generally lag behind, continued growth of these services helps to increase jobs. The skills needed for these jobs limit applicants and make it necessary to pay better wages.

For other service industry though wages are not going up and productivity gains go to business. Productivity gains amount to national savings, which can benefit everyone. Lately though they are contributing to America’s inequality of income.

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