Friday, 23 January 2015

Productivity – cutting both ways

Far from being a cure-all, productivity gains are instead cutting into the number of jobs

Higher productivity seems like the answer to all of our economic woes but being more productive is not all good.  Doing more with less is a way of making us wealthier by getting more out of the limited resources available.  Improvements in productivity often thus translate into more profits or lower prices (or both).  But there is also a nasty side in that one of the resources that can be done away with is workers.  Trends such as greater globalization and improvements to technology have resulted in many (well paying) jobs being put to the chop and we should not be expecting any respite soon.

Doing more with less

Economics is a discipline which is based on the notion of scarce resources.  It is no surprise then that economists rave about how improvements to productivity are the key to prosperity.  Any business that can produce the same products using fewer inputs is bound to do well.  Being more productive as a worker is also opens up the way for the opportunity to demand higher wages.  Any gains from higher productivity are split between companies, employees, and consumers but it is not always the case that everyone gets a share.

My favourite example of productivity gains where everyone got their cut was Henry Ford and the motorcar.  Ford did not invent the automobile or the assembly line but he did figure out a way of manufacturing cars cheaply.  The continued existence of the Ford Motor Company is testament to how much he and his family have thrived.  On top of this, workers at the firm also benefited from the new jobs that were created as well as the higher wages on offer.  Cars also became available to many more people thanks to the mass production of the Model T resulting in a lower price tag.

Suffering from cut backs

The example of Henry Ford and the Model T shows how more can be produced cheaply using more workers.  But this is only a viable way of making money when there is a rapidly expanding consumer market and an appetite for more and more goods.  This seemingly came to an end in the richer countries when most households became wealthy enough to buy the basics such as a car, a fridge, and a TV.  Without being able to tap into economies of scale by producing more and more, the emphasis has since shifted to producing goods at the lowest cost. 

One of the main avenues for cutting costs has been outsourcing manufacturing and some services to countries where wages are lower.  Computers and the Internet have also helped companies save money by better optimising their operations and reducing the need for some clerical work.  Companies have obviously benefited from this and we have as consumers (due to lower prices) but not as workers.  There is no modern-day version of the Model T that might provide a new source of lucrative job opportunities.  Instead we spend our money on services (eating out or going away on holiday) or goods where much of the value is in design rather than the goods themselves (such as clothing or electronic gadgets).

Cut yourself free

The challenge for developed countries is to create more high paying jobs for its educated workforce.  Instead, the opposite seems to be happening and the economic recovery after the global financial crisis has been characterized by a proliferation of jobs with low pay.  Higher unemployment allowed companies to hire workers on the cheap and this has dulled incentives for business investment.  It is easier to get things done using cheap labour than spending money on making your current workers more productive. 

Unemployment in countries such as the US and the UK has fallen but this has yet to translate into significantly higher wages.  Neither is a rapid improvement likely as companies are still timid about investing due to the weak momentum of the economic recovery.  Government policy is also a hindrance due to the focus on austerity measures rather than taking advantage of low interest rates to invest.  

The only way out for beleaguered workers seems to be setting up their own business which has become increasingly more popular.  The jump in entrepreneurship may be one of the few silver linings as people cut themselves free to become their own boss and to have productivity gains there for the taking.


  1. Hi,

    Most of these small companies have been set up so that the owner can work for bigger companies, which do not want to take on employees. Zero hours contracts and all of that.

    That is not entrepreneurship, it is desperation. Can't find a job, so have to start a single employee company.

    We are now also faced with ever more desperate governments looking to desperate measures from central banks. Once again I urge you to look at the global picture, and observe how the balancing of the developing countries against the developed countries is taking place.

    The force of globalization is thrusting relentlessly forward.

    I find it interesting that the tone against deflation has changed recently. With the incredible reduction in energy costs, this is finally being seen as a "good thing", leaving more money in the pockets of the people.

    But there is still a lot more pain on the way to the west.

    If a country is not producing stuff that other countries want to buy or does not have stuff in the ground to sell, then the only way is down.

    The UK has had a current account deficit for decades. It is living on the leftovers of the Empire and a reputation of being a safe haven for property investment. The is currently a lot of vicarious enjoyment that the Eurozone is under stress. However the Draghi QE will push the EUR down, further creating difficulties for the UK economy.

    The reaction from Carney will almost certainly be no interest rate increases, and bringing UK QE back onto the table in order to devalue the GBP.

    Which means that Asain currencies will continue to appreciate and balance out things a bit.

    The US still has the Joker card, as it supplies the world with USD's as the reserve currency. This currently seems to suit all those concerned, so I expect it to remain so.

    1. Thanks for your comments.

      I agree with many of your points.

      Not all of the new businesses we see are for the cheery reasons that I referred to in the blog. The lack of good job opportunities mean that companies have the upper hand when taking on new employees which allows them to impose zero-hour contracts on workers.

      I have written about a number of the other issues you bring up.

      Please see the links below for my thoughts on...

      the relative long-term decline of the West verses emerging markets such as China

      why good deflation is better than bad inflation

      and why interest rates will stay low in 2015.

      I do not think that quantitative easing by the European Central Bank will see the same level of concerns about a currency war as in the past. There is not much to be gained from having a cheaper currency at a time when the global economy is so weak. Even Japan has failed to export itself out of trouble so I don't expect any other countries to follow suit.