Most of the exodus from farming occurred generations ago, so Americans today have scant memory of the dislocations it caused. What we have instead is the abundance that comes from allowing the churn to deliver the bounty of higher productivity, wherever and whenever it occurs.

Telephone service is another rich example of how the economy as a whole benefits as some workers lose their jobs [see Table III]. In 1970 the industry employed 421,000 switchboard operators, and Americans made 9.9 billion long-distance calls. By 1994 Americans were making 83.4 billion long-distance calls. Yet new switching technology allowed telephone companies to downsize to 176,000 operators. ¹⁴ The telecommunications industry could do more with less because of a surge in productivity.

• In 1970 the industry handled only 64 calls a day for every operator, but by 1994 the volume of calls handled by each operator jumped to 1,300 - a staggering gain.

• Without the boost in efficiency, today's volume of long-distance traffic would require 3.6 million operators, or 2.9 percent of our labor force, instead of the 0.14 percent it actually takes. ¹⁵

• Americans would be worse off in two ways: we would lose the goods and services 3.4 million workers now produce elsewhere in the economy, and we would pay six times as much for our long-distance telephone calls. ¹⁶

Viewed in macrocosm and with the benefit of hindsight, it is easier to see that downsizing is simply conservation - recycling the economy's valuable labor resources.

Trend Toward Smaller Firms. Each company must determine its own "right" number of employees, but there is evidence that average firm size has been shrinking in most industries. In effect, the whole economy has been downsizing.

• From the early 1960s to 1980, the average company grew from 13.0 employees in 1962 to 16.3 in 1970 and to 16.5 in 1980. At the peak in 1970, roughly 37 percent of Americans worked in firms of 250 or more employees [see Figure II].

• In the past decade or so, the trend has gone the other way. The average number of employees per firm slipped to 14.8 in 1993 with only 29 percent of workers employed by firms of 250 or more. ¹⁷

Downsizing has occurred in a broad spectrum of industrial categories - manufacturing; mining; construction; agriculture; wholesale trade; finance, insurance and real estate; and transportation, communication and public utilities [see Figure III]. Average firm size has continued to grow in only two broad sectors. Retail trade went from an average of 12.3 workers in 1980 to 12.7 in 1993. Companies in the catchall category called other services, which includes the health care, entertainment and information industries, expanded from 11.3 to 14.1 employees on average.

Computers Increase Productivity. Why are companies getting smaller? One reason may be the computer, an innovation that has touched many industries. ¹⁸ Computers were rare two decades ago but are now almost ubiquitous. In fact, half of American workers now use computers on the job. The devices have become less expensive and more powerful as they have become widespread, allowing people to work more quickly and efficiently - increasing productivity. For example, with a computer a secretary can quickly revise and print the boss' correspondence (or workers can do their own), reducing the need for a typing pool. Using hand-held devices, salespeople can submit orders with a keystroke or two, cutting the need for personnel to process paperwork. In steel mills, automobile plants and other factories, computers control the production process, allowing one technician to do what once took dozens of workers. And with the advent of the Internet, individuals are increasingly able to locate and download information that once might have taken a small staff.

The computer might also help to explain why the average firm size in retail and many other services hasn't declined. More than mining or manufacturing, these businesses rely on one-on-one contact with customers, a task ill-suited to the computer. Thus, firms in these sectors do not get the same benefits from trimming employment.

A comparison between the United States and the European Community bears this out. While America's labor market remains relatively unregulated, many EC nations, hoping to thwart job losses, have saddled employers with burdensome rules on when and how workers can be dismissed. The red tape and reproach firms face if they attempt to cut jobs make them wary of hiring new workers in the first place. With few new opportunities opening up, workers cling to existing jobs. As a result, too many of Europe's labor resources remain frozen, and companies cannot respond quickly and aggressively to changes in the market.

The EC may have managed to "save" a few existing jobs, but the cost in economic performance has been high. Growth is slower. Productivity gains are meager. ¹⁹ And workers have fewer prospects.

• The United States has added 15 million jobs since 1990, a gain of 13 percent, while the EC has created 5 million, or just 3 percent.
  
• For most of this decade, unemployment in the EC has been at 10 percent or more, double the U.S. rate.
  
• Worse yet, more than 5 percent of the EC's labor force has been out of work for a year or more, while in the United States the figure is less than three-fourths of 1 percent.

W. Michael Cox
Federal Reserve Bank of Dallas
NCPA Senior Fellow

Richard Alm
Dallas Morning News

NOTE: Nothing written here should be construed as necessarily reflecting the views of the Federal Reserve Bank of Dallas or the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.