NCPA - National Center for Policy Analysis

Hard Times, Lean Firms

January 11, 2012

When the economy slumped in 2008, American firms demonstrated an unprecedented quickness in reacting by laying off labor and reducing costs.  While a fall in labor productivity usually accompanies a recession, the American economy largely avoided this fate.  Rather, its productivity has been boosted in defiance of expert predictions that workers can only be squeezed so hard for a short while, says The Economist.

  • After falling in the first half of the year, American labor productivity (output per hour) was 2.3 percent higher in the third quarter of 2011 than in the same period a year earlier (the fastest such gain in 18 months).
  • Manufacturing productivity in that quarter rose by 2.9 percent compared with a year earlier.
  • America's productivity growth has been more robust than most other rich countries' -- a benefit gained perhaps through America's flexible labor market.

The gains in productivity are not merely from what some call the "batting average effect," which is to say that gains have not only been realized because low-productivity workers were fired.  Instead, the increase in labor productivity seems to stem from two other areas: workers working harder and companies investing in cost-reducing technology.

  • Workers in this economy are willing to work harder, put in extra hours and adopt additional responsibilities because they are fearful of losing their jobs in an economy in which few can find them.
  • Businesses, when faced with an economic downturn, turn over every rock for methods to cut costs and increase production, and this has led many to increase their capital-to-labor ratio.

These factors have caused unprecedented and estimate-defying increases in productivity, but this says little of their longevity.  Many experts believe that, as workers become tired of their circumstances, employers will be forced to concede a relaxation of expectations.  This will allow workers to fall back toward previous standards.

Additionally, experts point out investments in capital and automation of basic functions suffers from diminishing returns.  In essence, these strategies can only boost production so much before the marginal cost outweighs the marginal benefit.  Thus, many of these experts are predicting a stagnation of the productivity growth in 2012 or the near future.

Source: "Hard Times, Lean Firms," The Economist, December 31, 2011.

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