The Economy's Good News: The Upside of Downsizing

Policy Backgrounders | Economy

No. 146
Wednesday, February 25, 1998
by W. Michael Cox & Richard Alm

Downsizing in Macrocosm: Problem or Progress

Figure I - Percent of Private Workforce In Agriculture

"Downsizing" may well be the new buzzword for layoffs, but it has been going on for centuries. In 1800, for example, it took nearly 95 of every 100 Americans to feed the country. In 1900, it required 40. Today, it takes just three. [See Figure I.] The downsizing of agriculture hasn't left the country hungry. To the contrary, the United States enjoys agricultural abundance - and much more. The workers no longer needed on the farm are available to provide new homes, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals and a dizzying array of other goods and services. We would have far fewer consumer choices today if farming had not endured one of history's most drastic downsizings.

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.

"The downsizing of agriculture from 93 percent of workers in 1800 to 3 percent today - hasn't left the country hungry."

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.

Table III - Downsizing and Productivity in Long-Distance Communications
  • 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.

Read Article as PDF