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.
