Macro Economics
Thoughts on Increased Productivity

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By washcomp
December 18, 2009

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Much has been said about the increase in productivity as workers are laid off. The remaining workers when compared to even reduced volume may be more productive. There is credibility to this which I can attest to from my own business experience over the years. When times are good, workers get hired for a variety of reasons (not all of them completely valid, but at least plausible at the time). Existing workers receive raises, tied to legacy inflation expectations, which in retrospect were overly generous compared to current business expectations. Termination decisions are based, in part, on the costs of individual employees (so those who received the greatest benefits due to "over generosity" are frequently the most vulnerable). When times improve, for as long as possible, current work force is utilized even at the expense of overtime. It is not only costly to terminate an employee (severance packages, disruption of processes, etc.), but expensive to hire a new one and frequently it is cheaper to maintain personnel levels by "rewarding" those already working for the firm with longer (more expensive) hours.

When new employees are hired, they tend to be at "reset" pricing, rather than the cost structure which was in place before the contraction took place. There is also more attention paid toward making sure each new employee is based on need, rather than premature expectations or speculation.

The above is a description of a "true" increase in productivity which can be maintained from that point forward. There are, however a number of other ways that productivity figures can be misleading:

1) Changes in inventory policy or other cost structures which create cost savings (either short term or as a change in business model) can increase profitability (again, frequently at the expense of jobs). A distributor we deal with (publicly traded, multi-billion in sales) sends me a quarterly report of how they are doing. Their sales are down 30% YOY, but their earnings per share have more than doubled. I have noticed that their inventory levels are far lower than they have been in the past and they are drop-shipping from manufacturers on an increasing basis. This moves the cost of inventory management "upstream" to the manufacturer, where frequently items are out of stock. "Just in time" inventory policies are chucked out the window and we simply have to adapt to the new reality of not being able to offer instant gratification to our customers. Life goes on and at some point a new steady state of expectation level will become the norm.

2) Changes in procurement policies also affect productivity. If an American manufacturer constructs their product in the US, but increases the foreign component value in their product, rather than manufacture it themselves, they need less workers employed. On the other hand, the full value of their item gets counted as being manufactured in the US (assuming 51% domestic content). This increases GDP as well as increasing productivity of the manufacturer's workforce.

In an organic sense, the first paragraph actually recognizes an increase in productivity (though at the ultimate result of lower body count, and less expensive workforces), while the following two points indicate an increase in P/L efficiency rather than the increase of productivity which is reported.

It is important to take the true meaning of reported figures into account when determining the future prospects of both individual businesses and our overall economy when considering future macroeconomic trends. At some point (I'm figuring around 2014), our nation will reach a new "steady state". We (hopefully) will have sustained ourselves through the recent bout of deflation, a number of banking issues (some still in the future 2010-2011), and a bout of inflation, followed by high interest rates. The resulting economy will not necessarily mimic that of 2006 any more than the 1950's mimicked the 1920's (period is long because we had the "intermission" of the World War in between depression and recovery). There will be both winners and losers. (Example would be the increase of Internet sales vs. brick/mortar favors small package shippers like FedEx and UPS, but reduces the traffic for bulk truckers).

The major issue I see is that we have a large population of highly educated people, but are likely to see less of a need for our current workforce in the absence of either major national infrastructure upgrades or a "quantum" new industry (past ones being the inventions of the PC, the Internet, etc.).

Just thinking out loud,