Manufacturing Productivity Increases – Another Cause of Jobless Recovery

We can do more with less. And we will do even much, much more with even less. Those who cannot keep up due to poor education will find life miserable, and poor. Not a judgment on the individual but business.

Manufacturing labor productivity continues to increase in the great majority of the world’s advanced economies.

However, we may have reached a point where job growth as we’ve known it within the USA cannot support our population. The cause is increased productivity — not normally thought to be a bad thing, and it isn’t.

Korea and Taiwan (8.7%) experienced the largest increases in manufacturing productivity from 2006-2007, followed by Germany (4.9%) and then the USA (4.7%).

What this means and why this is important

Through automation and better processes fewer workers can do more. We are probably underachieving what is possible.

Doing more with less is the only way the U.S. economy can compete competitively with a high wage workforce.

Danger #1: If demand is stagnant, or only the economy grows marginally, unemployment will naturally go up if productivity outpaces economic growth.

Danger #2: The pace of productivity gains is indeed growing faster than the economy — this means we need a better, smarter workforce BUT NOT a larger workforce. We probably need our workforce gross size to decrease.

The offset of becoming more productive faster than economic growth can support is that the unemployment level will naturally rise … and remain in imbalance.

Danger #3: To support the wages and lifestyle of a highly educated workforce requires continuous growth in productivity gains.

Practical Example

A practical example of the impact of productivity on employment levels if increased productivity were to remain fairly constant.

Year 1 – 100 employees each work for two firms; in Firm A there is an annual growth rate in productivity of 8.7% (Korea, Taiwan) and 4.7% in Firm B (USA).

Year 2
— Firm A needs 91.3 employees do the same amount of work.
— Firm B needs 95.3 employees.

Year 3
— Firm A needs 83.4 employees.
— Firm B needs 90.2 employees.

Year 4
— Firm A needs 76.1 employees.
— Firm B needs 85.9 employees.

Year 5
— Firm A needs 69.5 employees.
— Firm B needs 81.9 employees.

Theoretically there have been cost savings along the way — which have been plowed into NEW products and production — and the now missing employees have additional jobs.

However, in the case of Firm B, which mirrors the USA manufacturing productivity increase rate, if the economy were to only grow at the average rate of 2.5% over five years (2004-2008 2.5% was average growth) we would only be able perhaps to find jobs for 10 of the displaced 18 workers (Firm B).

The above scenario also does not create new jobs for the natural growth in the population.

Thoughts and Questions: If my thesis is true — future productivity will continue to grow faster than the ability to create/maintain full employment levels — then how do we deal with that. How does a supply and demand “market economy” compensate? Can it? Short term or long term trend? Is there a political solution? Is this a short term Malthusian view?

Chart and Data Sources:

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