Producing more, earning less
Posted 11:38 a.m., May 7, 2008
Today’s report on first-quarter productivity and costs provides a perfect example of the disconnect between economic theory and human reality.
What “productivity” means in terms of this report, and economics in general, is output per worker per hour. And here’s the first problem: Output is an old-fashioned industrial concept that economists are still trying to apply to our overwhelmingly services-based economy. In some jobs, output is difficult – perhaps impossible – to measure or quantify realistically or meaningfully.
Journalism is one such job, a fact that is causing MBAs across the nation to tear out their hair trying to figure out how to use their “metrics” and quantitative models to make newspapers more profitable. For example, is a reporter who writes four short, simple stories a day more productive than one who writes one long story a week that tackles a complex but important subject? I don’t think there’s a “true” answer to that question, but that can’t stop the industry’s bean-counters from plugging some kind of number into their spreadsheets.
Some of you might see journalism as a fairly trivial element of the national economy. So what about the output per hour of, say, doctors, lawyers, teachers, firefighters, police officers or members of Congress? Do we measure doctors’ productivity in terms of the number of patients treated per hour, regardless of the efficacy of the treatment? Which would be a more accurate measure of police productivity: arrests per day or crimes prevented per day? And if we want to measure legislators’ productivity, should we be counting their votes or their fund-raising prowess?
In short, the government’s number for output per hour inevitably is based on assumptions or simplifications that are open to debate, and on the estimates based on those compromises.
A second and more significant disconnect can be summed up in a slogan you may have seen at one business or another over the years: “Our people are our most important (or most valuable) asset.”
Viewed from one perspective, that’s a perfectly true statement, insofar as no business can exist or survive without workers and customers. But from the perspective of counting up dollars and cents, it’s completely untrue. You can search every annual and quarterly filing of every one of the thousands of publicly traded corporations in America from now until doomsday, and you will not find one balance sheet that lists “our people” on the statement of assets. On the contrary, the only place you’ll find the company’s workers is in the form of a liability for pension obligations, if the company is one of the few that still offers a pension; and on the income statement, where employee pay and benefits show up as expenses. So workers are just a cost and a liability, so it’s a “no-brainer” to cut the payroll when the economy slows, and to move jobs offshore whatever economic conditions may be: It’s simply the quickest, easiest way to reduce expenses.
And that’s how actual people show up in this morning’s government report: as “unit labor cost,” “hours worked” and “compensation per hour.” In all three cases, as far as businesses, economists, Wall Street analysts and investors are concerned, less is better.
The economic argument is that if businesses have to pay their workers more, they also have to charge their customers more. If customers are unwilling to pay the higher prices, then businesses’ profit margins get squeezed; if the customers accept the price increases, then inflation accelerates.
Of course, from the worker’s point of view, lower compensation per hour is highly undesirable. From that perspective, it seems obvious that workers who make less money are unable to buy as much stuff, which means businesses’ sales will decline, forcing them to make even more cuts in pay and payrolls, further reducing workers’ buying power, etc. etc.
Moreover, at this particular time, consumers’ costs are rising anyway because of the increasing prices of commodities such as oil and food. Pay cuts on top of rising prices aren’t something any reasonable person would expect to boost consumer sentiment, which is important because, as the financial press regularly reminds us, consumer spending accounts for two-thirds of all U.S. economic activity.
Today’s report tells us that productivity (non-farm) rose at an annualized rate of 2.2 percent in the first quarter from the fourth quarter of 2007; unit labor cost also rose at an annualized rate of 2.2 percent; “real” (inflation-adjusted) hourly compensation rose 0.1 percent; and hours worked fell 1.8 percent, a result of layoffs and production cutbacks. Compared with the first quarter of 2007, output rose 3.2 percent, unit labor cost rose 0.2 percent, real hourly compensation fell 0.7 percent and hours worked fell 0.6 percent.
Analysts and economists are calling that a positive report because, they say, it shows that there’s little inflationary pressure from workers’ wages and therefore gives the Federal Reserve room to keep interest rates low. But from the point of view of a working individual, what it shows is that compared with a year ago, fewer Americans are working, and those who do still have jobs are working harder but making less money.
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