The Labor Productivity Myth

[mhr]

Hi All,

Stephen Roach explains a puzzling economic question in his latest report
linked below.

How has the US economy shown productivity growth while creating so few
jobs?

As Roach explains in his Morgan Stanley report, outsourced American jobs
make remaining American workers look more productive because the
outsourced overseas labor is not counted as a labor input into American
corporations.

Per Roach, the US economy would have created millions of new jobs by
this point in a typical recovery. However, by utilizing overseas labor,
corporations save money and look profitable while preventing domestic
job creation and stifling economic recovery with lost domestic wages.

In essence, the corporations have the best of both worlds, increased
profits and growth while American workers are idled, bereft of income.

For those that have forgotten, Bush supports the loss of good American
jobs overseas.

Enjoy
------
http://www.morganstanley.com/GEFdata/digests/20031017-fri.html#anchor0

Global: Imported Productivity
Stephen Roach (New York)
Morgan Stanley
10/17/03

America’s fabled productivity miracle continues to be a key underpinning
for much that is special about the US economy. With productivity in the
nonfarm business sector up an astonishing 6.8% sequentially (annual
rate) in 2Q03 and 4.1% on a year-over-year basis, it’s hard to deny that
something quite extraordinary is going on. As I see it, what’s special
is an increasingly powerful global labor arbitrage between domestic and
foreign labor input that has given rise to a surge in offshore
outsourcing. The result is a jobless recovery built on an increasingly
tenuous foundation of “imported productivity.” The real issue is whether
this new strain of productivity enhancement is sustainable. I have my
doubts.

On the surface, there’s no denying the unique character of this
productivity-led recovery. In the first six quarters after the US
economy officially bottomed in 4Q01, nonfarm business productivity has
recorded a 6.7% cumulative increase. That’s the fastest six-quarter
post-recession rebound since that which occurred after the recession
ending in 4Q70. Equally impressive, however, is the extraordinary
shortfall in job creation that has occurred since the end of the last
recession in November 2001. Private nonfarm payrolls have contracted
about 1% (or 1.1 million workers) in the ensuing 22 months since that
cyclical trough. That stands in sharp contrast to gains of about 5%
recorded, on average, over comparable periods of the preceding six
business cycle upturns. In fact, had the current cycle conformed to the
prior-cycle norm, today’s job count would be fully 4.3 million workers
higher.

This same cyclical comparison allows us to calculate some hypothetical
productivity scenarios on the basis of alternative employment paths for
the US economy. If, for example, private nonfarm payrolls had traced the
path suggested by the earlier six-cycle norm, our calculations suggest
that productivity would have risen only 2.0% over the six quarters
ending 2Q03 -- less than one-third the pace actually recorded.
Alternatively, if hiring had closed only half the gap between the
current cycle and the six-quarter norm, our calculations would place the
productivity increase at 4.3% over the six quarters ending 2Q03 --
slightly more than one-third slower than published figures currently
indicate.

Snip ......

[many a good man]

1. Not so puzzling after all

Excellent article; thank you for sharing. This development cannot possibly be sustainable over the long term. First it was outsourced manufacturing and now we're seeing mounting outsourced telecom and IT work. Wages are bound to increase in India and other countries over time, though it would take a long time before their wage rates come close to our ours. What's good for corporations is not necesarily good for the economy as a whole or for individuals. This must be addressed at some point.

Is this a free trade issue? Can nations heavily tax outsourced labor and still be in compliance with trade treaties? Free trade is OK as long as advanced countries can replace the lost jobs with even better ones. Now we are losing some of our best jobs. This issue must become a high priority or this country is sunk.

[rogerashton]

2. There is no myth or mystery to explain.

Job creation is demand growth minus the sum of population and productivity growth. Thus, with demand growth of 3%, productivity growth of 4%, and population growth of 1%, we have job creation at 3-(4+1) = -2% -- two percent job loss. Do the math, dammit! For this calculation it does not matter whether the productivity growth comes from outsourcing or what it comes from -- cheap machinery (machinery is cheap) or better information systems or outsourcing.

This cycle does differ from postwar history in a different way. In 1949-1999, productivity growth has generally slowed during a downturn as businesses "hoarded labor," probably to save rehiring costs in the expected recovery. This cycle they have continued cutting labor costs and perhaps speeded this up. One interpretation is that they are acting like they don't expect a recovery. Anyway, again, it doesn't matter a lot whether this cost-cutting is a result of outsourcing or new cheap machinery -- the impact on employment is the same.

Outsourcing was rising during the late '90's boom and did not prevent unemployment from dropping in that period from around 7% to around 4%.

Outsourcing is a predictable consequence of improved communications technology.

Now: here's a question. When you suggest that the "productivity improvements" are not sustainable, what do you mean?

1) Productivity will decline to the previous level, or

2) Productivity will not continue to increase at this rate?

If the first, I am pretty certain you are mistaken and would like to see some reasoning to support the claim. If the second, I am pretty certain you are right, but there is nothing new about that. Productivity trends are only moderately persistent. When one new method of cutting labor costs has been exhausted, businessmen will find another -- and it may or may not yield equally fast reductions. But that is the genius of capitalism, to keep staggering from one labor-saving innovation to another, while digging its grave by creating the preconditions of a different kind of society. That, at least, is the Marxist view.

[many a good man]

5. Globalization and the Labor Market

The goal of globalization is to expand the labor market to the whole damn world. With advances in communications and other technologies, what percentage of American jobs will ultimately be vulnerable to outsourcing? Productivity and profitability growth will only further deepen the divide between Wall Street and Main Street.

The standard of living in the United States for the bottom 90% has steadily eroded over the past thirty years. The momentum will continue to build until the political backlash is strong enough to force change. A populist revolt is possible that will demand protectionism and redistribution of wealth.

The late 90's economic miracle was mostly attributable to the widespread development and availability of business information technology, the Y2K problem, and the internet bubble. A confluence of events like these is unlikely to occur again any time soon. A simultaneous surge in (home-grown) productivity and employment is not likely to be repeated.

Factor in the end of the era of cheap energy (i.e., Peak Oil) and the possiblility of the death of the dollar standard, and this country may face its greatest economic crisis ever. It will take monumental feats of ingenuity and creativity to avoid this looming train wreck.

One possible way out, as I see it, is the Apollo Project for a national renewable energy development program. It would stimulate research and technology and provide jobs laying out the new infrastructure. It would likely begin with using wind energy stored in hydrogen fuel cells. Cheap renewable energy could be made available to the Third World which would finally allow those nations a chance to develop. Bilateral trade agreements would replace globalization during the long period of structural adjustments to labor and capital markets. The new economic age ushered in by a new energy paradigm would completely change the face of the playing board in a positive manner.

We are past the point where corporate innovations in enhancing productivity (by any means) will strengthen the system enough to weather the next crisis. Bold, visionary leadership is demanded now and it won't come voluntarily from CEOs. The will and strength of national (and international) community must be brought to bear.

[Code_Name_D]

6. Learning to divide by zero.

Job creation is demand growth minus the sum of population and productivity growth. Thus, with demand growth of 3%, productivity growth of 4%, and population growth of 1%, we have job creation at 3-(4+1) = -2% -- two percent job loss. Do the math, dammit! For this calculation it does not matter whether the productivity growth comes from outsourcing or what it comes from -- cheap machinery (machinery is cheap) or better information systems or outsourcing.

Do the math? Ah yes. 1+1=2, 1+2=3, 1+3=4. This is informative. A closer look at the math, and see if I can get the gist of what this guy is saying.
Job creation = Demand growth – (sum of the population + productivity growth)
Or... is that population growth? Um...
Job creation = Demand growth – (population growth + productivity growth)
That looks better. You can only add like numbers. But are these numbers truly alike? Or are we just playing around with the "%" on our keyboard? (Matiral withdrawn on reconsideration!)

Then...
This cycle does differ from postwar history in a different way. In 1949-1999, productivity growth has generally slowed during a downturn as businesses "hoarded labor," probably to save rehiring costs in the expected recovery.

Now...
This cycle they have continued cutting labor costs and perhaps speeded this up. One interpretation is that they are acting like they don't expect a recovery.

Okay. Sanity brake from the gibberish. He seems to be saying that productivity = aggregate demand / labor pool. Before, when we saw aggregate demand drop, with labor staying the same at they "hoard labor" remaining the same, we would see a drop in corresponding the productivity.

But, post 2000, we see the formula changed; labor pool = aggregate demand / productivity. So as productivity goes up, the labor pool must go down accordingly. As he agues.

Do the math, right? But while these two examples ARE based on the same formula. However, they are expressing two dramatically different behaviors within the same market place. Pre-2000, he argues that be variable in play was aggregate demands. (Which he simply called a "downturn.") But post-2000, every thing has changed. It's a whole new market place. Now the variable in play is labor, or more accurately "labor costs." What happened to demand? Is it suddenly constant, going up, going down? Was labor in the past really as stable as he might lead us to believe? Its interesting for me to remember the down-sizing of the 80's, and how the lay off trend would follow my dad to job after job after job.

Anyway, again, it doesn't matter a lot whether this cost-cutting is a result of outsourcing or new cheap machinery -- the impact on employment is the same.

He seems to forget that we ARE talking about people here. From the supply sider's frame of mind, the workers who fill these jobs are nothing more than a variable in formula, to be reduce and manipulated with no more concern than a setting in a video game.

Outsourcing was rising during the late '90's boom and did not prevent unemployment from dropping in that period from around 7% to around 4%.

But this outsourcing that he was referring to, was the domestic depopulation of low end manufacturing jobs, such as textiles and assembly. At the same time, there was a technology boom that made a lot of new jobs, especially highly technical positions. Clinton pushed a jobs retraining program, as well as vocational schools adding new workers to the pool, offset the losses in manufacturing and textiles.

But we now know these new jobs were unsustainable. An entire industry was built on a bubble. When that bubble popped, vast chunks of the industry, and the jobs they provided, disappeared with them. No better real world example can be seen, than Silicone Valley. An entire city, literally springing up from the desert to power the new technical revolution. First from chip manufactures, who wanted to be close to the high quality silicate in the area, a raw material needed for making theses chips. But in the mid 90's we saw a change in the outsourcing seam. Chip manufacturing plants were moved over to Japan, Korea, and Vietnam, taking the jobs with them. But a new field came on line, IT or Information Technologies, and the Dot.com boom was started.

The 90's boom saw a drop in unemployment because even the outsource companies who were taking up the new jobs, were highering local Americans. As jobs were "outsourced" the total labor pool was not directly effected. But when you start outsourcing jobs to foreign companies, the domestic labor pool IS effected. But the way he would tell it, unemployment isn't going up as we speak, because it didn't go up in the past for doing the same thing.

Outsourcing is a predictable consequence of improved communications technology.

Is it? Then how come we didn't see similar outsourcing trends with the founding of the Bell Telephone Company? How come we didn't see this same trend when the Continental Cable came on line, connecting North America with Europe? How come we didn't see this trend with the launching of the first communication's satellites? How come we didn't see this in the 70's when computers started to become practical?

Outsourcing is not the result of the improved communication technologies. It is the result of a willful decision made by CEO's to move operations to cheep labor, to maximize profits at the expense of the worker. To prove this, I need only point to the author's own words. Which are as follows:

When one new method of cutting labor costs has been exhausted, businessmen will find another -- and it may or may not yield equally fast reductions. But that is the genius of capitalism, to keep staggering from one labor-saving innovation to another...

I trust I have made my point. Also note how effortlessly he switches from "labor costs" (measured in dollars) to "labor-saving innovations" (measured in man/hours or man power.)

The problem with his argument is "why India?" If these new technologies are truly cheaper. Than wouldn't they be just as cheep in the US as in India? Am I to believe that this communications technology lets a worker in the US and a worker in India talk to each other cheaper, and more efficiently, than if they were in the same room? If these new technologies are truly more efficient, letting fewer workers do the same, if not more work. Than why higher in India at all? Wouldn't we just see labor reductions here in the US? Am I to believe that India is more technologically advanced than America, if these gains can only be realized over there and not here in the US? If reductions in labor costs are so important, than why do we STILL see CEO's seeing increases in their compensation? Compensation packages to the tune of MILLIONS is now chump change. If the average worker was to make that with a standard 40 hour work week, he would be making at least $520.84 an hour.

But what about those labor reduction here in the US? Not only a supply sider tend to forget that "labor reductions" means an American is going to lose his job and not be able to pay off his credit card debt. A supply sider doesn't even CARE. Profits come before all other considerations. The "geniuses" of modern capitalism is founded on nothing more than the pursuit for profits at the expense of all other considerations.

As to weather these "productivity" gains can be re-produced again next year isn't necessarily the question. The problem is that the market place is now being driven by "productivity" numbers. Its now no longer a matter of choice, they HAVE to reproduce these gains next year, and then again the year after that. Supply siders arn't as much trying to tell us that these gains are the result of technology, as much as they are trying to convince themselves that these gains are NOT the results from the use of slave labor. In theory, technology will continue to advance for ever, by what they call "Moors Law." But the flight to cheep labor however can only go so far. As cheep as you can get, is zero, and I would love to see how you can build an economy, without any workers.

Companies may be seeing gains now, but its eating the seed-corn. Remember this formula? productivity = aggregate demand / labor pool. ? How logical can it be if you have a labor pool of zero? And every one here should know, that you can not divide by zero.

[rogerashton]

8. Well, it is easy to win an argument

(in your own mind, if in nobody else's) when you misrepresent the argument you proport to oppose. See, I didn't write

" productivity = aggregate demand / labor pool"

you did. By the way, get out your algebra book and learn the meaning of parentheses.

[Code_Name_D]

10. That is the only thing you have a problem with?

I was wondering what was taking you so long. I presumed you were consulting your notes or something.

when you misrepresent the argument you proport to oppose. See, I didn't write " productivity = aggregate demand / labor pool"

You are right. You didn't say that. A substituted a word that that I thought closely represented your idea in a simpler, less cultured form. But I don't see how this misrepresents your argument. Of course, you are at liberty make your case at any time you wish. Instead, you seem to open up with an ad hominem. Oh hum.

By the way, get out your algebra book and learn the meaning of parentheses.

Again, you are at liberty to render any correction you feel needs to made. A second ad hominem falls far short of this. I drew those formulas directly from your own wording. I even double checked them, and tested them with a small simulation to mare sure I have them right. It is conceivable that I made an error, especially sense your formulas don't show up in my notes. I am not perfect.. But you have presented any thing to the country. Care to correct on this, or are you just going to hurl more insults at me?

[newyorkdork]

3. Thank you

for an interesting artcile

[rapier]

4. Read Roach

Roach should be read regularly. That he works in the belly of the beast, Wall Street, is surprising. He takes an alternate view of macro economic forces at work now that puts him well out of the mainstream. Read and learn.

In this particular offering he makes the logical but ignored association between stagnant incomes and corporate gain from same. Let there be no doubt that the current trend which I call corporatism is the author of most of our current troubles. Not all however. For that we are all to blame by asking for or expecting too much.

[srpantalonas]

7. source to china: Fewer local workers, same output= more prod.

http://www.crystleforsenate.com/offshoring

[rogerashton]

9. See, productivity stats are based on a concept called "value added."

Which means that if the job goes to China, the "value added" by that job also goes to China. Whatever the American company pays to its Chinese subsidiary for the outsourced product or service is deducted before productivity is computed.

Now: if the lower-productivity jobs are shifted to China, at even lower wages than are paid in the US, three things happen.

1) An American is left without a low-productivity job and thus experiences a decrease in income.

2) A Chinese gets a low-productivity, low-wage job that is better than the even lower-wage job he had before.

3) Since the jobs that remain in the US are the higher-productivity jobs, average productivity of those who continue to have jobs is higher.

That's what the productivity numbers are supposed to report. I guess I am nationalist enough that 1) is sufficient to lead me to conclude that this is a bad thing -- although the Chinese-American in the office next door to mine disagrees. But, damn it, that's nationalism, not statistics.

As for "output over the labor force," that's NOT what productivity statistics measure -- but it is worth looking at, and it does lead to some different conclusions. Here is a joke about that. (Sorry, no cite, but I think I saw it in AP years ago).

The world economy consists of four gas stations.

In the Japanese gas station, 4 men in white uniforms pump your gas and bow a lot, and gas is $5 a gallon.

In the European gas station, 1 surly guy in jeans pumps your gas, three unemployed guys across the street play bocce ball, and the gas costs $5 a gallon (tax included).

In the American gas station, you pump your own gas, it costs $1 a gallon, and four unemployed guys mug you and steal the rest of your money.

In the Russian gas station, gas is 50c a gallon, but there is none available because the four guys who work there sold it on the black market.

OK, that's pretty dated. But: are we wise (unlike the Japanese) to allocate our labor in this way -- to increase productivity by ruthlessly disemploying men and putting them in prison when they try to enjoy a little criminal consumerism, rather than keeping them employed and damn the prices we have to pay as a result? No, I don't think we are wise to do that. But that's a matter of values, not statistics. If you don't like it, that doesn't mean the statistics are wrong -- they just don't measure what matters to you. So, you are the center of the universe and that makes them wrong?

Nor is there anything new about all this. THIS IS CAPITALISM AS USUAL. If you don't like it, fight capitalism, not statistics.