The pandemic productivity boost

The good news: GDP is now slightly higher than before the pandemic.  The not-so-good news: Employment remains 4.4 percent lower.  The intriguing news: labor productivity (which is simply the ratio of GDP to employment) has increased at the fastest rate in 20 years.  If this productivity spurt can be maintained, this would mean rising living standards for all of us.  

I must admit that I was at first surprised by these data.  Covid forced companies to invest more in cleanliness, which means more inputs to get the same output.  They also had to make massive adjustments in operations, and I expected that to be a mixed bag at best.

This recent NYT article provides some insight into why productivity has increased.  A key factor is that the pandemic accelerated the adaptation of some labor-saving technologies.  We see this in the food service business where more orders are placed online (even among customers sitting inside restaurants).  Also, people shifted more of their shopping from in person to online.  Amazon can deliver any consumer good to your door without having a bunch of people standing around to wait on customers.  

Another driver has been work from home.  It seems that workers and bosses have struck an implicit bargain in many workplaces to split the difference on saved commuting time: working more hours AND having more free time at home.  

Economists link sound management to firm success

Economists have done very little research linking how different management practices correlate with indicators of firm performance such as productivity and growth.  The reason is quite simple: economic research relies all too often on data collected by the government and the government does not collect data on management.

Two professors at MIT Sloan and a colleague at Stanford decided to collect data on management practices and, with the help of the Census Bureau, linked it to data on individual manufacturing plants.  The focus was on 16 measures of monitoring, targets and incentives which were combined into a management index.

The results, summarized in this HBR piece, were quite striking: every 10% increase in the management index was associated with a 14% increase in productivity.  Well-managed firms also were most likely to grow and less likely to close.  Management practices have a bigger effect on  productivity than IT investments, R&D intensity, and worker skills.

Interesting question raised by the study: we know that investments in IT, R&D and worker skills are quite expensive compared to the cost of changing management practices.  So why don't the poorly managed firms make adjustments?  Maybe it has something to do with who the managers of those firms are!

Surging productivity and stagnant hiring

Productivity continues to grow at a rapid clip.  Today's WSJ takes a closer look at why.  Without even reading the article, students with a firm grasp of economics should suspect that either the cost of capital has fallen, the cost of labor has risen, or both. 

The answer is all of the above.  Capital costs have fallen because interest rates are nearly zero and companies could write off 100% of investments made in 2011.  Uncertainty about future labor costs (health care and taxes) makes employers averse to new hires.  As a result we see modestly rising output and it is coming from increasing output per worker rather than increased employment. 

Michael Mandel takes a deeper dive into the productivity issue in this article.  He points out that outsourcing is another important factor behind the increase in output per unit of input.  The reason is that we use value added, the difference between total revenue and labor and materials costs, as our measure of output.  When supply chain managers find cheaper sources of materials (or services), that increases margins and output with no change in labor or capital. 

Historically increases in productivity lead to higher standards of living; at least that was the case in the 20th century when society first shifted out of agriculture to manufacturing.  Now we are shifting out of manufacturing to services; hopefully the increase in living standards is just around the corner.

The productivity mystery in the Great Recession

Aggregate output has been rising since June 2009, yet employment has dropped by 329,000 over the same period (July 2009 through August 2010).  The only way to increase output with fewer workers is to raise productivity.  There are now some signs, according to WSJ, that businesses have done all that they can do on the productivity front and that any future increases in output will have to be generated through increased hiring. 

Usually increased productivity growth is viewed in a positive light, as the key to increased standards of living over the long run.  Rapid productivity growth is most often associated with technological change, capital-labor substitution or increases in human capital (e.g., better trained or educated workers).  Over the last two years there is some reason to believe that none of these factors has been at work; instead as fears of joblessness escalate companies have been able to "squeeze their work forces," as the article mentions.  The good news for workers: as the economy recovers there will be more hiring opportunities and the squeeze will be over.