NCPA - National Center for Policy Analysis

Product Churn Requires Adaptability And Skills

July 16, 2001

Due to rapid innovation, product lives have shrunk remarkably over the past 25 years, resulting in "product instability." This has had profound effects on business organizational choices and the demand for labor.

Product turnover has increased substantially and new products are proliferating. Based on data for as many as 60,000 French firms, researchers found:

  • The annual number of patent applications in France has doubled since the mid-1980s to roughly 120,000 a year.
  • Between 1984 and 1995, the share of jobs devoted to the development of new products has risen from less than 5 percent to 7.5 percent of the work force, while the share of production jobs has shrunk.

Organizationally, companies are shifting from business models that stress efficiency and production toward business models that promote flexibility and adaptability. One reason is that as product lives shrank, the benefits of super-efficient production fell, while adaptability became more important.

The labor market has felt the effects of this rapid change as well:

  • The share of skilled jobs rose 6 percent over a decade, from 28 percent in 1984 to 34 percent in 1995.
  • During the same period, the share of production employment dropped 7 percent while employment in product development and commercialization rose by roughly the same proportion.
  • Companies that have more than 70 percent of products that are less than three years old employ 9 percent fewer production workers (compared to companies with negligible product turnover).

This product instability may help explain the growing income gap between skilled and unskilled workers.

Source: "Product Market Instability and Organizational Choice," Economic Intuition, Winter 2001; based on David Thesmar and Mathias Thoenig, "Creative Destruction and Firm Organization Choice," Quarterly Journal of Economics, November 2000.

 

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