On the Relationship Between Worker Productivity and Layoffs

By James Kwak

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 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.

Comments

[herbert hoover:]

The bullshit government statistices on productivity were skewered in an article in today's NY Times. The government doen't know which industries have moved offshore so they ignore that information. They know that production is up and number of workers is lower and attribute that to "productivity gains" rather than product imports.

The entire unemployment, productivity and worker salary information is a shell game.

Nov 09 01:19 PM

[bob adamson:]

Might it not be more accurate to observe that (in light of the extraordinary events of the past two years) employers are, even more than usually during a recession, reluctant to call back laid off workers or engage new ones even when markets for their goods and services show signs of recovering.

In other words, it's not so much lay-offs as call backs.

Nov 09 09:49 PM

[BRUCE E. W.:]

The study of nurse staffing to patient ratios demonstrate conclusively that not only will productivity be exploited progressively but that cost expenditures are minimized to the detriment of the quality of care itself. All this while profit margins become core concerns. The neverending pursuit of pure profit is inevitably matched to a relentless pursuit of cost reduction. While this sounds good on paper, in the market of the real world it means burnt out loyal workers strapped to a daily personal liquidity crisis and it just as often reults in cheaper products and watered down quality assurance. The "sweatshop" mentality of our market economy has been legitimated and justified by the "price" theory of market incentives. The problem is that no one at the top levels seem to realize that one persons' price is another persons' cost.

Outsourcing had taken this around the world and kept a consumer price index reasonably aligned with demand. Even then, however, American Labor was damaged and it became a political football (along with migrant worker scapegoating). Now the room is full and it has turned on a stratified society that can no longer indulge itself in denial. Even if the gross numbers of static economy can be twisted to appear to justify the "wealth" building financial stealth of our economy, the future dynamics of an American household "Standard of Living" will decline proportionately.

Nov 10 01:23 PM